UPDATE: we swapped our Xbox wireless controllers around so that each Xbox One S now has a pair of identical Microsoft controllers- whereas before we had a mixture of standard and new (Xbox one X style) controllers.  Since then we have not seen this bug again. So we start to think the bug only occurs when the Xbox One S has two different types of Microsoft wireless controllers. 
END OF UPDATE 

Split screen local game, in creative mode, on XBox One S with automatic updates enabled.

Two slightly different official wireless Microsoft controllers.

All goes fine, but suddenly Minecraft reports that one controller has lost connection.  This can be either of the two controllers.  But visually the affected controller has NOT lost connection.  It remains lit up and connected but the only option offered is to join as Player 3 by pressing the hamburger menu button on the controller.

My daughter doesn't want to join as Player 3 for fear that all her progress will be lost (or perhaps the game will disappear, if the affected controller was Player 1, I don't know).

Tried changing batteries, no luck.  Controller light stays on so presumably it never really lost connection anyway.

Update: home screen shows v1.16.201.  This is Minecraft installed from XBox One store and with auto updates enabled.  We have Game Pass Ultimate in case that makes any difference.

Checked for updates on the controller firmware  - both showing up-to-date.

Is this  a known issue? I searched but didn't see it here.  This keeps happening so they don't like to play split screen any more.