I agree totally.
The Royal Family lived in Covenant. They escaped through the tunnel when the city was sacked the first time.
Madrigal at the time was probably the safest place to be. Remember, the war didnt reach the free cities at all until the 17th year.
Therefore, Madrigal was not the place where the Royal Family lived... They wouldn't be hanging around on the front, they'd be ruling from their capital deep inside their own territory... except they weren't. To say otherwise - which you'd have to do to support GURPS - is illogical.
Sili, it makes no sense whatsoever for Madrigal to be the capital in light of this information. Its OK for GURPS to be wrong.
-Ares