The tragic recent death of a journalist who had recently signed a two-book deal made me wonder – I am keen to think about anything other than the death itself -- what happens in this case? Would the project be abandoned by the publisher or would the first of the two, perhaps, be carried on if that manuscript was mostly on its way?
Sometimes a publisher will include a clause that says "if the author dies, the publisher can find a new author to complete the book."
I usually have that clause struck out because it's my client's work, not the publisher's, and they don't get to dictate stuff like that.
The heirs who now own the intellectual property, or the literary executor, decide what to do.
It's case by case; there's no industry standard; there's no common practice.
Unfortunately I know this first hand. When Andrew Britton died at a very young age, his agent worked in the office next to mine, albeit for a different agency. She came in to tell me, and I knew at once from the shock and sorrow on her face that something was terribly wrong.
When the dust had settled, so to speak, the question was what to do with Andrew's unfinished novel. His family, his agent, and his publisher worked it out.
It was a matter of solving the problem, not doing what a contract dictated.
And often times, that's the way things really get done in publishing.