@Bianca361 Yes, she should cancel under the extenuating circumstances policy.
BTW, there likely isn't anything dangerous about the asbestos removal (assuming it's really the truth)- there are regulations about removing asbestos and generally only qualified people are allowed to do it. They usually wet it down, so the fibers aren't flying around. There's nothing inherently dangerous about abestos if it's not disturbed. It's the dry fibers being breathed in that's the danger.
If there really is demolition going on next door, I can see why she wouldn't want to take a reservation- you may be okay with staying, going out during the day, but she may be worried about getting a bad review because of it.
But If a host wants to cancel, the host should cancel, if a guest wants to cancel, the guest does it.