My wife's father signed as the homeowner
Are you in possession of that contract? Are you sure he signed with the word "homeowner" right next to his name or was identified by the word "homeowner" at the top of the contract?
You need to make sure of your position because so far it seems that you and your wife authorized him to take care of this for you and any contractor he hired would have seen him as having "apparent authority" to act as your agent.
If, on the other hand, he actually LIED to the contractor and said "I own the home" then you have the option of repudiating the contract and throwing your father-in-law under the bus. I doubt if that would go over well with your wife.
And, yes, the contractor could certainly sue your father-in-law if you didn't allow him to do the work.
You've got a big mess there and no leverage. I think you'd better let the contractor do the work as long as the insurance is paying for it.
In the future when you have a loss to your property, call your insurance first, have an adjuster come out and write up the repair estimate, then YOU call contractors and give them copies of the estimate and see who will do the work for that price.
Nothing good ever comes of letting your relatives mess around in your business.