I found the source to definitely be that the main ground wire and the wire to the starter were both touching the sump on the engine block. This caused the protective rubber to melt, those wires touched and boom. S
That stinks, and we see this far too often.
Catalina has done quite a bit of sloppy electrical work over the years and in many cases ignored ABYC safety standards as well. The photo of the back side of your AC/DC panel alone has a number of ABYC standards violations.
We took delivery of a brand new 2005 Catalina in 2005. Before we even launched the boat I went through the electrical system with a fine-tooth comb and made numerous safety changes. One of the changes was installing over current protection so the electrical system met ABYC standards and exceeded them for the cranking conductor. The vessel needed a total of 7 additional fuses to meet the bare minimum. Issues such as the battery switch location were too much work at the time, so I just made it as safe as possible.
What I could not see, on the 310, was that they cut the positive wire too short so when the engine ran/vibrated the cranking conductor chafed on the engine block, just like yours. The wire actually had enough length but this was under the cabin sole and had merely been zip-ties too short.
We made it as far as the Isles of Shoals on day one of the delivery-trip and abruptly lost our instruments etc., when entering the cove. Once anchored I checked the DC panel then went to re-start the engine on bank 1, = dead? Odd, brand new boat...?? Switched over to bank 2, it starts. A about 40 seconds into running all DC electrical is dead again..... I immediately check both 300A fuses, = blown. Open engine bay, odd, I don't
see anything abnormal? I finally blindly unbolted the starter cable, pulled it out, and there it was, a small chafe hole with a massive burn mark. Taped it, sleeved it with about 12" of spare hose, replaced both fuses and we were back in business. As soon as we got back to ME the wire was 100% replaced, properly secured with insulated metal clamps and placed in a very heavy duty conduit as well.
They key here is that if I had not installed all those fuses before we took delivery our boat, it could have been burned to the waterline. You guessed it Catalina shipped our boat, even in 2005, without battery over-current protection. It also shipped with a lack of over-current protection for many other wires as well. These fuse requirements have been part of the ABYC since the 80's.. When I called Frank he completely blew it off and said the ABYC was "Merely a suggestion, it's not a law.".... Yet, for marketing purposes, the boat proudly wore an ABYC sticker even though the boat was NOT built to ABYC standards.
Keep in mind here that the ABYC is not perfect either, not even close, and to this day still allows an "exception" for over-current protection for the cranking conductor. I won't go into the politics, and can't due to NDA, but this was supposed to have been "fixed" a number of years ago in the E-11 standard. All of us on the electrical committee were quite surprised with the updated standard when nothing changed...
Moral of the story; OVER CURRENT PROTECTION IS NOT OPTIONAL and you CAN EXCEED THE ABYC STANDARDS, for a SAFER BOAT!
For a melt down of your magnitude every wire in every race way will need to be pulled, examined and replaced if necessary. While you're in there I would strongly advise bumping the AWG of all battery conductors to 2/0 wire so you can safely fuse each bank at 300A+.
Unfortunately, I don't think your insurer will cover this one, we've dealt with this before with a few of our customers, and the insurer will just claim the boat has not been maintained to a safe standard of care...
P.S. Can you upload a photo of the chafe point and the point on the engine block where the two met? It will be helpful to other 320 owners!