How do people end up in this situation? Without that backup seed mnemonic, users are sitting on a ticking time bomb... one small accident and all their funds are gone.

For ETH recovery, try following the instructions here for connecting to MEW: https://support.ledger.com/hc/en-us/articles/115005200009-Set-up-and-use-MyEtherWallet

If that doesn't work, then I would contact Ledger Support and see if they are able to assist with a way to access ETH on an old firmware without updating. They recently added a dedicated Support Twitter account:  https://twitter.com/Ledger_Support

Or you can try researching other options (including logging a ticket via their online form) here: https://support.ledger.com/hc/en-us