First and foremost, please understand that the funds available must be used to pay your grandmother's funeral bill, her costs of final illness, and her creditor before any remaining funds will be available for distribution.
I practice in Illinois, not California, so you should check my answer with a California attorney familiar with estate matters, but this should be quick and not very expensive at all.
Like Illinois, California seems to have a "small estate" procedure under which funds can be transferred without probate if the total value is under $100,000, and provision is made for paying proper claims against the deceased and the estate. A small estate affidavit form provided by the Los Angeles Superior Court is linked below for your consideration. If the estate qualifies, you can complete that affidavit and submit it to the insurance company, probably with a death certificate, an affidavit of grandmother's heirs, copies of the bills to be paid, and a letter explaining the situation. Here in Illinois the creditor (insurance company) would then issue check(s) to the creditors, funeral home, and the heirs of the deceased. I believe your and your friend's lost property will qualify you as creditors to the extent of your loss.
Answering your question on AVVO, does not create a lawyer-client relationship between us. You should check my answer with a California attorney familiar with estate matters.
You might check to see if there are exemptions and allowances that might allow you to shelter some of the assets. Under Michigan's small estate affidavit procedure, the funds are not subject to creditor claims. You should review the California procedures with a probate attorney, as you do not want to make any mistakes or be deemed to make a fraudulent conveyance. Depending on the amounts involved, it is possible the creditors will simply decide to let it go. But if you have an estate open, it will provide them an easy means to collect.
The California small estate affidavit and instructions can be found, here: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CDYQFjAA&url=http%3A%2F%2Fwww.lasuperiorcourt.org%2Fprobate%2Fpdf%2Ftransferform.pdf&ei=L0uTT4ajOeiv6AG_r42NBA&usg=AFQjCNEQqds1PxP46jCESjc9V2t0KUGuzw&sig2=qHZBuhytkdEi9Hc2ZZWozA
I am licensed to practice law in the State of Michigan and have offices in Wayne and Ingham Counties. My practice is focused in the areas of estate planning and probate administration. I am ethically required to state that the above answer does not create an attorney/client relationship. These responses should be considered general legal education and are intended to provide general information about the question asked. Frequently, the question does not include important facts that, if known, could significantly change the answer. Information provided on this site should not be used as a substitute for competent legal advice from a licensed attorney that practices in the subject area in your state. The law changes frequently and varies from state to state.
You should be able to recover the insurance proceeds with a small estate affidavit in Calif. if the total value of your grandmother's real and personal property was worth $150,000 or less when she died, if claiming after January 1, 2012. That total includes the gross value of her home, notwithstanding the mortgage. You should have some kind of lien on the insurance proceeds because they wouldn't exist but for your loss. In any event you can assert you are the successor on the affidavit if the other conditions for the affidavit are fulfilled.