I'm sorry for your loss and the circumstances in which you now find yourself. It seems, from what you say, that you are caught between the terms and conditions of your purchase agreement with Canadian Affair and the position being taken by your insurance company.
It is the position of your insurance company that I really don't understand. The company seems to have accepted that your situation falls within the terms of your policy for purposes of reimbursement. It's the amount of the reimbursement that is at issue.
From a common sense perspective, your "loss" does include the taxes and surcharges levied on your base fare. In fact, in Canada, the Government passed legislation last year requiring Canadian airlines to show the total amount of the fare, including the base fare and all taxes and surcharges, when advertising on their websites. It all, of course, depends upon the terms and conditions of your insurance policy. However, is there any sort of internal appeal process within your insurance company that could look at the first level decision to disallow those components of your fare? Are there "consumer advocate" types attached to your local media that could investigate it for you ( and perhaps place some pressure on the insurance company)?
Edited: 5:42 pm, February 08, 2013