You can use the /Applications/Utilities/Disk Utility application to do either of the above.
If you have a separate disk that you can reformat then open the Disk Utility application, select the Erase tab, and use it to reformat the hard drive as Mac OS Extended format, not case sensitive. Make sure you are not doing this to the hard drive containing Mac OS! Then install Civ3 into the new drive and you should be able to apply the updater to it.
If you prefer, you can just create a disk image. This is probably the neater option. That's a file on your main hard drive that behaves like a separate disk. Launch Disk Utility and click the New Image button at the top of the window. Select the 2.6 GByte option, no compression, read/write disk image, name it Civ3 or whatever you wish, and select your Desktop as the location. Click Create and it will make the disk image and mount it. Highlight the volume in the list at bottom left of the Disk Utility window and check that it shows as Mac OS Extended (Journaled) and isn't shown as case sensitive. If this is not the case then select the Erase tab and reformat it to be so. Then you can treat it as though it is a new hard drive and install Civ3 into it, followed by the updater. That will then be your "virtual" case insensitive hard drive from which you will run Civ3.