I feel awkward about not engaging much in a thread that I started, but it really was intended more as a warning than as a discussion. The best summary I can give is
Skye is fantastic (and the west coast, in general, is great). Definitely visit.
If you're making a quick run to Portree, along with a drive around the peninsula...with maybe a trip to the Quiraing...you can ignore this warning. Skill & experience are enough to get by.
The situation deteriorates as you go further west, toward the Duirinish peninsula, or south toward the Cuillin hills. The frequency and proximity of large potholes means you cannot avoid entering one before clearing another. Experience is great, but it doesn't trump geometry and physics.
By chance, I ran into a local guide, while visiting the glenfinnan viaduct (we were both looking to get that perfectly-timed photo of the steam train) Paraphrasing his words: some roads on Skye have deteriorated significantly over the past 2-3 years. They weren't built to handle the traffic they're getting (he acknowledged that tour bus/van traffic is partly to blame).
In hindsight, I'd definitely recommend the optional liability reduction, but I would compare the cost of an SUV to the cost of a compact car. If it is more than 100GBP, I would just get a smaller car and plan on being charged for damage. We were charged Β£100 for damage (no surprise), but that's probably less than than the extra up-front cost for an SUV. The main benefit would be comfort.
Cheers,
Chris