There was an game that did this (obviously nowhere near as well) called 1NSANE. I spent hours smashing cars off of things, because I find the destruction so interesting and awesome.
Things I'd love to see:
* Soft body on soft body. Imagine Destruction Derby 2 with this stuff.
* Explosion modelling - Stuff getting ripped apart and sent flying.
* Aircraft destruction modelling - if you could clip your wing on a building and have your aerodynamics adjust accordingly.