I'm starting to think that it might be better if cities were not entirely destroyed after a successful attack by monsters (or any other non-faction units). Instead, I believe it would be penalty enough if the city lost a level or two (representing the death or uprooting of it's inhabitants), lost a few buildings and maybe suffered extra unrest for a while (representing the population's discontent over not being properly defended and morale loss because of the death and carnage). These three penalties would still make a successful attack by monsters against your city an extremely bad thing; but not something you that makes you feel like you need to re-load to keep your campaign alive. A low level city (level one and maybe level two) would still be destroyed outright.
Realistically, it also makes sense that monsters may devastate a large city without completely removing any signs that it ever existed. As I said above, this would still be a major setback. Also, I think it would be good for the AI civs, who sometimes have a particularly difficult time dealing with monsters.
Conversely, as I think that monster attacks on large towns come with too severe a cost (being completely wiped-out), I sometimes think that your sovereign's death comes with too little cost. Lots of times when there's not enough boots or shields to equip all of my champions/sovereign, I find myself giving them to my champions over my sovereign -as I'm less worried about him being killed than my champions. This seems backwards. The life of the soveriegn should protected above all others. and the sovereign's loyal subjects should be willing to give their lives to save his or her's.
But, for the sake of balanced gameplay, I wouldn't suggest anything too drastic; though you should definitely feel the loss of him being beaten. I think you should lose some fame (representing the loss of an "aura of invincibility"). Champions are probably less likely to want to join a sovereign who is getting defeated. A temporary unrest penalty (maybe just 10 unrest for 10 turns) through-out your civ would also make sense, as it could represent the population questioning his ability. I'm not suggesting a penalty that would seriously set a civ back. But I don't think that the sovereign's fall in battle should be of too little consequence. Also, I don't think they (sovereigns or champions) should be able to use their bonuses to city unrest while they are re cooperating from an injury in that particular city. If anything, they should wish to hide knowledge of their injury from the people.
Thanks for reading