I believe that the part that failed was the ratchet and pawl freewheel mechanism in the hub. My LBS said that after troubleshooting w/ Shimano, they are sending a new set of internals for the hub. I don't know if I'll find out exactly what failed. I should have the bike back tomorrow. If allowed to examine the hub carcass, I'll let you know.

Regarding the Michelins, I was running the Civia Bryant-standard Michelin City 700x32s. I too ran them at 85 psi., any lower and the rolling resistance was noticeable. Me + rig is about 250 lbs. and the roads/trails/curbs here can be torturous.