Goodness gracious! Thank goodness he wasn't harmed.
It sounds like the car and an electrical short in some wiring or something. I have seen other early 90 E-Class cars with engine fires, but never a fire in the instrument panel. There was someone here that said their mother or mother-in-law had a 98-00 Mercedes ML320 SUV that burned to a turn. That fire also started under the instrument panel. I am guessing en electrical short in the wiring in that Mercedes as well. That is what I do not understand- is why a car would have an electrical fire, if is supposed to be protected by fuses, unless someone added an accessory, without fusing it.
I have seen several cars in the past, with burned out interiors. Who knows why? It is very strange, but the majority I have seen have been 80s-90s European cars (especially Porsche and Ferrari- engine fires), as well as many 80s-early 90s American cars- especially Chryslers. One thing I can say about Japanese cars- I have never seen one that had an interior fire.
Here is another fine example of a late model European car that had a fire. This is totally UNACCEPTABLE- this is a 2002 high $$$$$ LUXURY car.
http://cgi.ebay.com/ebaymotors/ws/eBayISAPI.dll?ViewItem&item=2458974881&category=43915
I am assuming that your father had comprehensive insurance on it?