I worked on Azure during its incubation at Microsoft so has been a while since I looked under the hood but failure of all nodes at once should not happen, as long as the upgrade and failure domains are assigned correctly to your service. I know there are simpler concepts with the new fabric that let you express this easier as well but I am likely out of date on the latest development on Azure.
We do not test this condition heavily in our suites. The method I described is a supported path to rebuild the index file. If we have lost the directories, the engine will try to compensate and silently fix and rebuild but I would not recommend relying on this at all times.
thanks
-cihan