1) Yeah, you can backup computer software, as long as you dont have to break any encryption to do it. So hacking out copy protection on a game so you back use the backup disk isnt allowed in the UK.
2) CD/DVD's that disintegrate at high speed are normally caused by manufacturing defects, as such MS should replace those disks FOC, or at least shipping cost only. If your DVD/CD Drive is faulty and scratches the disk, then it would be up to you to take it up with the drive maker for compensation. Fire/Flood etc as others said... more important things to worry about, like family members etc.. House contents insurance should over replacing everything else