Recently rebuilt engine. Bike started an ran great how ever I did notice a horrible sound. Turns out the primary clutch had rubbed on inner an outer cases. Any idea what the issue could be?

Here is the outside cover

[2015 Z Force 800 53/Trail EPS]

You are pointing to the secondary clutch, not the primary. The only time I have seen anything line that is when either the input transmission shaft is bent or the clutch sheave is warped from using something other then a spanner to hold it while torquing it. Let me also mention also that, that rust showing on the end of the primary shaft means there may be an issue with that bearing. Maybe just dry but better check it.

Thank you. I will try an get a video with the machine running so we can see what's going on.