Reproduction steps:
1. Open User's project
2. Open "Main" scene
3. Position the editor camera so both objects are in view, showing the sphere or cube (LOD1 or LOD0).
4. Select LOD2 of the object 'TestObjectWithLOD_NotPrefab_Works' in the hierarchy.
5. Drag TestMaterial from the project window onto the selected object in the 3D view.
6. Select LOD2 of the object 'TestObjectWithLOD_Prefab_Broken' in the hierarchy.
7. Drag TestMaterial from the project window onto the selected object in the 3D view.
Note: Prefab object - the cube or sphere (depends on how close the camera was) (LOD0 or LOD1) material was changed.
Non-prefab object - the capsule (LOD2) material was changed.

Expected: LOD2 renderer of both objects to have TestMaterial applied, and the other LOD levels to be unaffected

Actual: Non-prefab object is set up correctly. The prefab instance changes to whichever LOD level would currently be shown if a specific LOD object wasn't selected, and that object's material is set instead.

Note: It is only set correctly if the camera is far enough away that the capsule would be shown.

Note: The wireframe of selected object is shown, but the solid form of the incorrect LOD level is overlayed.

Reproducible: 5.2.4f1, 5.3.0f4, 5.3.2f1, 5.3.4f1, 5.3.4p5, 5.4.0b16, 2018.3.0a8