The charter company I fly for would back me 100% for diverting if a passenger refused to stop smoking. It has nothing to do with the type of flying you're doing.
Hindsight is 20/20, but it sounds like this captain should have been a little more forceful. I think letting passengers get away with lighting up AND being abusive to a crew member is unacceptable.
That's the way it should be. Some of the crap I've heard from friends flying for some of the sketchy south Florida outfits just leaves me scratching my head in bewilderment.