Cracked a steel fender today. My fault or design problem? And now what should I do?
I think your fender failed because of the stress that you introduced by attaching it without having it properly reshaped. Metal fenders must be mounted stress-free, otherwise they will be prone to fail and crack. This means that before installation the fender has to follow the tire without being supported by the frame and fender struts attachments.
Mounting metal fenders properly
Start with reshaping the fender so that it follows your tire at a constant distance of 15-20mm.
To enlarge the radius, squeeze the fender edges towards each other (as if you would try to make the fender narrower) and it will open up. Work all the way along the fender in order to obtain a constant radius/curvature. With stainless steel fenders this is a bit more difficult than with aluminium ones, but it is possible. If you want to decrease the radius, bend the edges apart instead.
When the fender has got a nice shape following the tire with constant distance (about 15-20mm), drill a hole at the brake bridge, so that the lower end of the fender extends some centimeters below the chain stays (this keeps drip water off the chain). Deburr the hole carefully (this is where cracks start!) and attach it at the brake bridge. A leather washer goes between fender and frame, and a large diameter but rather thin stainless washer between fender and bolt head (the washer on your picture is far too little).
Measure where the chain stay bridge attachment is, and drill the hole there. When deburring it, you can ovalize it a bit with a file if it is not exactly in the correct position. It is very important that you don't put any stress or strain on the fender when attaching it at the two frame mounting points.
Now it is time to attach the fender stay(s) 10-15cm above the back end of the fender. Once again, bend the stays before installing them so that they have the right shape/angles to be mounted stress-free.
Well-mounted stainless steel fenders can hold a long time (many 10000 kilometers).