Felix's Encryption Damage Experiment
PGP 8, WinRAR 3.2

Bad sectors were simulated by filling regions of the file with hex 00 bytes.

A PGP-encrypted single file will mess up on decryption, but still let you try. The resulting file(s -- sometimes PGP will create several) are good, except around the edges, and of course, except for the slight problem of being in several pieces. Programs naturally weak at dealing with damage (e.g. MS Office) will not be able to use the file.

A RAR-encrypted file with a recovery record works very well, and is probably the recommended way to go if public/private key encryption is not needed.

A PGPDisk volume will mount even if it's punched absolutely full of holes. It seems to be part of the PGPDisk encryption scheme to scatter the data in random, unpredictable places throughout the Disk file, which makes it harder to destroy. If data regions are affected, the mounted disk itself behaves somewhat as if it had bad sectors -- pieces of files will be missing, etc. This means that it should be unnecessary to put the whole disk volume inside another recovery record, if the important stuff already has recovery records inside it. PGPDisks will fail to mount if their file size is changed.