As it turns out, there are no regulations about this and most airlines do not automatically refund the baggage charge just because they lost the luggage.
So, why is that?
Well as it turns out, the airline industry figures they are charging people a luggage handling charge and indeed they have handled the luggage -- perhaps mishandled, but handled none the less. They maintain they have done their job.
Some airlines will allow a person to add the luggage handling fee onto the cost of the lost luggage, but it is not automatic.