I've always thought it was a reasonable policy, but the only time it affected one of my games was like 4 years into a classic game, and then it just made sense. Too much had happened in the game and the balance was clearly upset.
Recently however, two players were banned, and I took over one in a classic game, and the other in a world game, and now I see things slightly differently.
In world games, two players don't really mean shit, unless they're neighbors, and even then, it seems unlikely that they are able to upset the balance very much because there are so many other players.
In classic and AM games, there is definitely a balance issue. However if they are caught in the first year, then they haven't really had time to affect anything.
The world game I took over never got a message that it was going to be cancelled. I think this is appropriate, but there still should be a clarification on the policy.
The classic game though did get a message saying it would be cancelled. But after "protest" on the global by me and one of the players who was in the game originally, Jmo, being the wise and fair mod that he is, allowed the players to choose. France, the other player who wants to continue, hasn't even taken Spain or port yet, and Belgium is still open.
Since this happened in the first year and both positions were taken over in fall retreats, there hasn't really been any imbalance due to the banned players. So I think jmo's decision to let the players choose is the right one. I suggested that since he paused the game to allow for a draw decision prior to cancelling, that our unpause votes be used as our indication to continue. And if anyone decides not to, then I'm fine with it being cancelled. But it got me thinking about the policy and I figured I'd bring it up to see if maybe we can get some clarification on the special cases.
I might suggest something along these lines:
World games ... Only take action if someone in the game requests it
Classic games ... If before completion of the second spring diplomacy phase, pause and tell the players if everyone draws, its a draw (current policy) but if everyone unpauses, then continue, otherwise cancel.
Ancient Med ... If before completion of first fall diplomacy phase, pause and tell the players if everyone draws, its a draw (current policy) but if everyone unpauses, then continue, otherwise cancel.