Let us first dissect the sentence into different clauses.
Reef diving in the Caribbean, - This is a modifier modifying the noun divers
proof has been found by divers indicating
that white lesions caused more coral damage than they had previously thought.
Indicating that – that is a replacing the action of indicating.
Had is used to compare two actions in the past with the previous action with a had. There are no two actions that are being compared on a timeline in this sentence hence had is incorrect in this answer choice.
A. proof has been found by divers indicating that white lesions caused more coral damage than they had
Reef diving in the Caribbean, - This is a modifier modifying the noun divers
Incorrect modifier modifying proof.
Had is used to compare two actions in the past with the previous action with a had. There are no two actions that are being compared on a timeline in this sentence hence had is incorrect in this answer choice.
B. proof found by divers indicates more coral damage by white lesions than had been
Reef diving in the Caribbean, - This is a modifier modifying the noun divers
Incorrect modifier modifying proof.
Had is used to compare two actions in the past with the previous action with a had. There are no two actions that are being compared on a timeline in this sentence hence had is incorrect in this answer choice.
C. divers have found proof indicating that white lesions caused more coral damage than
This answer choice is clear concise and direct. This is also grammatically and idiomatically correct choice.
D. divers have found proof that indicates more coral damage by white lesions than that which was
Than that which was is unnecessarily wordy and awkward. It is unclear what that refers to.
This choice is in inactive voice which makes it unattractive.
E. divers have found proof which indicates more coral damage by white lesions than that
It is unclear what that refers to.
This choice is in inactive voice which makes it unattractive.
Answer choice C