Here is my conclusion and analysis based on my experience with rusty hydraulic equipment.
Releasing the chuck and operating the actuator is what caused the damage. But that was not the reason for the damage.
When a chuck and actuator are asembled the amount of travel in the chuck mechanism is less than the maximum possible travel of the actuator; it has to be so that the actuator does not bottom out. This means that the nicely finished surface on the actuator piston rod (piston tube I guess it is) does not travel full distance through the seals. During use, with water based coolant getting everywhere, you can get a lot of rust inside the spindle and down around the actuator. On the piston tube this rust can occur all the way up to the limit of travel in the seals.
Then you removed the chuck mounting bolts and operated the actuator many times. Now the piston tube moves further in each direction because the free hanging chuck no longer limits its travel. So the nasty, corroded, pitted, yucky section of the piston tube goes in and out of the seal and destroys it.
To some extent the rust was not the reason for the damage, the root cause of the damage was lack of preventative maintenance. But who takes off the chuck and actuator on a regular basis to clean it and coat everything with grease to prevent rust? I think you have learnt an expensive lesson, a bit more expensive than mine.