This is something I cannot create with my limited programming knowledge, but it is a great idea. Historically when an advancing army takes a capital from another nation, the rest of the territory falls to the invader. Shouldnt this happen in civ? When an invader takes a capital, the rest of the cities go to the invader with a low experienced most-up-to-date unit guarding it. All units like workers, etc. go to the invader. However, military units go to far away places like jungles, mountains, etc. to start a guerrila campaign. They would have 20 turns to take a city back and start over. They would still be a civ with diplomacy, etc. However, to also continue the historic part, there could be a small national wonder (or improvement?) called the Fleeing Government. This would take 5 turns to complete and the palace would move to a city of your choice. Then your empire is saved. Questions/Comments Much appreciated.

It's not exactly true, most of the times only when the government falls the region is annexed, it's actually very common for a army to try to retake the country and for the capital to change. I remember about the portuguese royal family fleeing to their colonies in Brazil after Napoleon invaded their own country.
A large number of royal families in exile during medieval and early modern times and etc.

during WW2, the dutch government temporarily declared London it's capital so it could still be recognized internationally as a nation. (it still had colonial posessions to wage war from)

Yes, and that could happen in this mod if the two civs were in permanet alliance and the Dutch gov. built "Fleeing Government."