If the fault is still there, and the generator breaker trips, both will remain at source two and without power to either service, unless the generator shuts down on a fault.
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I think you mean if there is a fault at the ATS or downstream? I agree.
Normal transfer switches would go back to source one if source two, because the decision is made by the transfer switch, not the generator. But with Generac, the generator makes the decision to transfer (at least they did previously) If the other service trips, the generator will not start and transfer, but at least it will not transfer into a fault if it’s still there.
Agreed. The controller on the Generac generator closes the transfer relay to change from normal to emergency