How I learned the rule about where engine failure should be expected.
First lesson, J 3 Cub, taking off toward the hospital. The instructor told me before the roll began, "That is a hospital we have to climb across. If the engine fails, no matter the cost to us, we are not crashing into the hospital." He, obviously was planning his actions for failure on the departure.
A short time later, he told me that I should be continuously watching for and rating potential emergency landing sites.
After 5 minutes of hanging on the edge of stall, he asked "Where will you land if the engine fails?" I immediately pointed to a large open field with scattered pine seedlings, and large weeds, an abandoned pasture, and said "There". Gliding down with the engine idling, he critiqued my choice. It had many advantages, and a few dangerous features, mainly the cable supported radio tower, with the need to go between the cables up from the concrete anchor blocks.
Full throttle climb out, and return to the airport.
Next instructor, the same takeoff briefing, followed by " Did you know your first instructor lost the engine on takeoff this week? He made the turn back and landed on the airport. Amazing feat."
All of my good instructors insisted on knowing where we were going to land, at all times, from takeoff to landing, and surprised me with "engine failures" of the verbal kind, at unpredictable times. My scan outside the plane were first for other planes, then places to land. On cross country flights, the 'places to land were a string of potential sites way ahead, that were judged as the came closer, and either kept, or replaced with better places that were not as close to the route being flown.
Taking off from College Park, Md KCGS,to the SE, left turn to Kenilworth Avenue, North and land on pavement or grass according to traffic. To the NW, down into the branch of the Annacostia River, as there are too many buildings for any other choice that does not expose other people to harm. That choice remains the only good one until the Beltway median can be reached.
Obviously, I would expect a DPE to call for engine out anytime, but also expect that he had a safe place in sight when he did it. If it was a verbal call, I would not expect a land and takeoff selection, but if the throttle was pulled, I would expect the selection he made to be a no damage land and takeoff site that was reachable, and a safe landing could be achieved if the engine did not respond when the throttle was reopened. That was the standard that all my good instructors used, and DPE's should make the same commitment to your combined self interest.
I have not had a DPE pull the mixture to shut down for engine out simulation. My instructor for the PPL explained that he had done that in his early instructing, but the prop quit turning one time, and they did not get the engine started again, resulting in an off airport landing. On the ground, the engine decided it would run, and they took off from the large pasture they were on. That apparently is not a unique experience, as several of my later CFI's specified that we would never pull the mixture closed in flight.
The DPE has an obligation to you, and should never put you in a position where the flight cannot be safely continued. His status as a DPE is at risk if he does put you or your plane at risk.
