1. In law, there is taken to be a contract here, because your wife relied to her detriment upon the representation made by the insurance company that they would continue cover on the basis she remained on her former husband's policy. The law, under the principle of estoppel prevents the insurance company from resiling from representation made by them as your wife deterimentally relied upon this representation. So the insurance agreement is upheld but on the basis of estoppel.
2. The estoppel prevents the insurance agreement from being voided by the insurance company. However, this estoppel only relates to the past and cannot continue into the future. So whilst she can make a valid claim on the policy owing to events in the past, the insurance company cannot be forced to continue cover into the future to your wife on the same basis.