The liners should indeed protrude above the level of the block castigs so they get maximum clamping force between the liner and head face. Like any metal they can warp although not being in direct contact with the combustion surface it's probably less likely but not impossible.
If the liners are flush with the casings then I'm afraid it's not a simple task to regain the height. The engine will need to come out and completly stripped down to get the liners out of each casing half. I did mine a winter or two ago, as yet not refitted to the car so I'm hoping mine are now OK. They were pretty much level with the casing height.
To remove the liners is not easy, I made a crude tool not unlike a threaded puller which did 3 fairly well, the last though would not budge and I had to resort to putting the casing in a hydraulic bearing press to get it to move. The seat then needs thoroughly cleaning of the inevitable corrosion and then new seals made to lift the liner up. On the advice of an expert I have used sheet copper which is available in the thicknesses needed. It can be cut with ordinary scissors. You need to assemble the liner in the engine, pressing it down using clamps so it seats firmly then measure the clearances to then calculate the thickness of seal.
It is quite a mammoth task so hopefully you won't need to do so!
Looking at yours it's clear that water has been escaping at the top side near the intake port, it also looks like the fire ring has slightly failed on the rear cylinder, in line with the spark plug. If so that may have pressurised the water enoughto cause the leak, evidence of water ingress in that cylinder also by the washed look on that intake valve face.
There are pictures on my thread with regards to the liner removal if you need to visualise the drama!
