I think many people can become too attached to their work, and cannot divest themselves of the "it is part of me" mentality. It is one paper. It is not the sum of your work, nor a complete representation of your work. If this person gave you bad guidelines then he should accept some responsibility. Saying that, you took on the task....or didn't it occur to you at the outset that this may present difficulties?

May be a bit premature to rule yourself out for a year based on a 'couple' of failed applications. The cream will rise to the top. If you've enough faith in yourself as a good historian you'll convince others. Preparing an exit strategy seems pragmatic yet slightly defeatist. Your topic, however, can sometimes be a ball and chain if it is not one of the 'sexy' subjects. Have you published, or delivered at conferences at all during your three years?