I believe that is insurance fraud and is criminally prosecutable. The insurance company involved, if not the local district attorney,would be interested in hearing this story.
If the latter, you're wrong. You're free to use the insurance money any way that you'd like.
For example, the cost to repair a car back to its "original condition" is often much higher than its value even though the car is still driveable. In that case, the insured is free to take the money, buy the car for its current value, which is significantly less, and pocket the difference.
If your house burns down, you're not obligted to rebuild.
What stuck me as odd about the story is how "2 racks" of "beige boxes and randomly built servers" could come anywhere close to being as valuable as people's salaries.
I think if people are getting laid off, it would happen one way or another, regardless of the insurance money..