Sounds like you already know the answer to your dilemma. The wall needs to be torn down. The foundation needs to be exposed to see what you have, and be able to determine the appropriate repairs. If there’s a water problem then some sort of drainage allowance will need to be put in, followed by either a grade to the ground, or rebuilding the wall. Far as who is to pay for all this goes you might want to consider an attorney to help you on that. If nothing else it will let the previous contractor and the insurance company know that you mean business. I’d guess that without legal help your insurance might kick something in the kitty but they’ll dodge as much of the cost as they feel they possibly can.
Someone else on this board might be able to offer you some better advice on both, the legal aspect of this and the structural repairs… But I doubt anybody can give you specific direction for repairs unless they’re handy to your location so they can see the situation first hand.
From thousands of miles away I see three possible directions for you to take. 1) You sell the house and run away as fast as you can with whatever you can get. 2) You fix the problem and possibly pay for all of the cost. 3) You investigate more thoroughly (as you are) and find out how much of the cost to repair you will be responsible for and then decide if cost is worth it or do you use option 1.
Oh… and there’s always the option of doing nothing and let things collapse. Could be that the insurance company would prefer to make repairs at higher cost after more destruction instead of preventing those extra costs by correcting the problems before they become catastrophic.
So you spend a little more money and get some legal advice and from there you’ll be better able to make a decision as to what your next step might need to be.