Dad should take the fall. She should take the car back to him and say “It broke”.
He laid out the cash for a car and handed it over to someone whom he knew well enough to have predicted the outcome. It’s like giving a fire extinguisher to a monkey, and then blaming the monkey.
No matter what she said later on to cover her ass (like everyone does), we really have no idea what kinds of discussions or negotiations took place in the insurance office. Normally the agent will try to sell you everything in sight, whether it is good or not.
I’m curious how the OP knows the people involved. Is he the father in question? Is he related to these people? Or does he just live down the street from them?