Best way to eliminate the possibility of smoke smell is to gut and seal the framework and sheathing. Actually watch out for this insurance adjuster as he sounds not too bright either but tight.

You want assurance there will be no fire damage residual smells in the house. Actually gutting and redoing the second floor is not that costly. Plus any insulation benefit with new vapour barriers etc will not hurt. By gutting you also get the attic insulation plumbing and wiring up to code. This house would have had no vapor barriers when constructed. Even worse perhaps no insulation in the upstairs walls. Your adjuster pretty obviously does not want to pay for the code upgrades but this goes with the job.

If there was any water up there the finer hairs on the existing insulation if any can be compromised. As for load bearing walls downstairs there should be normally at least one.

I am not in love with insurance companies adjusters as they are so unpredictable. Sometimes just fine and other times I do not want to get into it.

If you have a friend with a substantial amount of building experience you should have him have an overall look and talk to him. If you have little building experience back and forth discusions with the adjuster may not be too productive.

Also forming up a good relationship with your local building and electrical inspectors if they are competent could go a long ways. The electrical inspector for example is not going to allow the knob and tube wiring to remain upstairs or would not in my jurisdiction. I would even pay them especially the building inspector a little more to appear quite frequently on site during reconstruction. The contractor will be far more on his toes.

I do not cut corners myself but am all too aware of far too many that do in the construction trades. I am only a part time builder at best though. You do not want what is just basically a patch up job on the cheap to occur.

Now is the time to upgrade the windows and external doors even if some if not all of that cost comes out of your pocket. Make absolutely sure there is a building permit in place. Otherwise this adjuster may be ripping you off. If I totally gut a house for renovation everything has to brought up to code. A partial gutting may not require this. So much depends on local practice I imagine though.