So , If you screwed this up badly would the low oil pressure light come on? With the light off can you still risk toasting your engine?
I'm not totally sure, but here's what I think might go on. Normally, the oil fills the canister area and flows from outside the filter into the inner core going through the paper, and from there it gets pulled through the engine. Snowbum has diagrams of the oil flow here:
http://bmwmotorcycletech.info/oilsketch.htm
There is high pressure in this region...there have been instances of collapsed oil filter elements. At any rate, the oil finds the least restrictive path to the rest of the engine...generally that's through the filter element, but it could be through the pressure relief valve in the base of the canister area. All that should be good.
If the o-ring is cut, what will happen is that the oil finds the path of least resistance which would be past the o-ring straight into the sump. So, the oil being pumped through the engine is unfiltered. This is what will destroy the engine along with the lowered pressure to critical bearing surfaces. Don't know if the oil pressure light will come on...it only comes on with very low pressure but I think in the situation of o-ring failures, the pressure doesn't drop significantly, it's just unfiltered.
I'm certainly open to corrections on this...but that's what I think is happening.