That is to say, if, when it is creating a system image, it writes to a sector that has (unbeknownst, as yet, to Windows) gone bad, so that the data does not recorded correctly (or, indeed, if it does not get recorded correctly for some other reason) will the program realize this and either try to compensate, or produce an error?
It makes a checksum of the backed-up files and checks the checksum against the original. Windows 7 can’t really do anything other than checking if the files are the same. And, in my case, it did not attempt to recover because it assumes (correctly, IMO) that any error of this type is caused by faulty hardware.
Note that a checksum mismatch doesn’t necessarily mean the backup media is bad-- it could mean the source media is bad. I spent a lot of time fixing a “bad” backup drive when it turned out the source drive was the problem.