Insurance company want me to either surrender my totaled car or pay off the negative equity

No, the banks and insurance company are not colluding on any aspect of the situation.

You owe the bank $14k. That's all that they are concerned about.

The insurance company will pay your claim according to the policy agreed to. That's all they care about.

Yes, the insurance company requires you to surrender the car as part of the gap insurance coverage, and yes, they will try to recoup some of their costs by selling the car for salvage or scrap. But that's just the insurance company minimizing their costs, and has nothing to do with the bank.

If you don't surrender the car, you will still receive an amount (maybe not $12k, depends on the policy) from the main policy and will owe the balance to the bank. You can decide if it is worth the effort to try to get more than the gap by selling a salvage car on your own.