I got a reply a few weeks ago. Somehow my situation was an "exception" because they consider the damage to be akin to just losing a wheel:
I am grateful for the check but I do wonder about their rules. The damage was clearly more severe than just losing a wheel. Hopefully, they change their rules and this sort of damage will automatically be covered. They claim that my bag wasn't designed to survive their equipment but are we supposed to have bags made of solid steel? How durable of luggage do we need? They say that there is an increase in damage to bags because the bags aren't durable enough but I do wonder if they are trying to force too many bags through their system. Either way, my next bag will definitely be more durable.
Part 1 Southwest Airlines and Their Lack of Customer Service
Part 2 Southwest Airlines: My Letter