Ooooh, I love that quest! I just went through it again this week, actually!
I agree with you that the devs could have done more with it, though. The first time I played, I fully expected to end up facing the possessed little girl in the end, perhaps even interact with her (or the demon possessing her, more likely), in true horror movie fashion. Needless to say, I was a bit disappointed when it was just a regular mini-boss fight.
Also, I think the atmosphere could have been even more spooky. The orphanage in DAO had ghostly voices of children echoing through the walls (and actual ghosts too iirc), which I think was pretty neat.
As for what happened, I think the d'Onterres' daughter was a mage, but instead of sending her to the Circle or find a tutor for her (like Isolde did in DAO), they kept her hidden because it would have been a disgrace on their family name. It's also heavily implied that they were physically abusive towards her (you can find a very disgusting codex entry in the library about how to prevent magic in children, which involves drowning the child almost to death!) Untrained Magic+Abuse+Loneliness=A demon taking advantage of the girl and possessing her, resulting in the death of everyone in the estate. There's also another codex entry that suggests the father had a templar from the Circle come with a mage to do something to keep his daughter trapped inside the estate (the magic box, I suspect?) and that why the demon couldn't get out.