Ah, but that would require support for mesh-built objects, no? Second Life mesh support is promised RSN.
OpenSim has some mesh support, but is I think, somewhat hobbled by SL compatibility concerns.
I've never tried Second Life, but I'd be very surprised if they're not representing shapes internally as some kind of 3D mesh: it's an important technique for getting decent performance on modern graphics cards. If they are doing that, then that's sufficient for them to be able to do automatic LOD calculations too.
Actually they can. It's entirely to generate levels of detail automatically and get good results. The open source program MeshLab, for example, (http://meshlab.sourceforge.net/) includes code to do this.