The procedural generation isn't my department, so can't say much too much about it. I do know that we are always working towards reducing the cases you speak of though.
The shading though, I can comment on that: It's a good suggestion, but it's not an issue of phong shading at all. All our models are actually exported with full smoothing turned on, which we then turn off directly in the shader applied to them within Unreal. It is solely an artistic choice - there is nothing keeping us from having smooth models if we so choose.
The actual reason behind it is partly technical: The way we generate the mesh for the actual levels does not currently support any smoothing at all - and so we decided to make that a stylistic rule rather than something we had to fight or try to hide.
I dream of a sort of middle ground where things get smoothed up until a certain angle. We might revisit this later, but there are no plans for it right now.