Does this same daemon constantly monitor the status of the wifi during runtime and if it drops reverts back to AD hoc mode.
Yes
does it only run on boot to check for the presence of WIFI
No, It constantly monitor.
It doesnt makes sense to me to put it in the rc.local as if I understand correctly that is only run at startup to start the #wifi-live-or-reset
Yes.
The Wifi Signal level could cause internet drop off, confirm wifi Signal level:
http://forum.arduino.cc/index.php?topic=188101.msg1583665#msg1583665
The Wifi has build in re-connection function, the code is really for back plan.