The oddest thing about cover, to me, is the angles. If you are in a straight horizontal or vertical line set up like YOU ALLY ENEMY, then the YOU have light cover from the ENEMY, and from the compromise YOU can't stealth.
As you say, there is a difference between horizontal/vertical and diagonals, in terms of superior cover from allies, but this carries over to any rules that depend on cover, not just stealth. And you could say this about D&D's unrealistic assumption that diagonals are equal to horizontals for the purposes of distance. That just isn't true, but I didn't write the rules.
As for your second scenario:
The second oddest thing is that it doesn't matter how many things are in the way. It can be YOU ALLY ALLY ALLY ALLY WALL WALL ALLY ENEMY, all in the straight line, and you would still only have cover.
Acutally the corners of walls (solid obstacles) are consider to block lines of site. So even just 1 wall grants total cover (ie. 4 lines of sight blocked).
However if you change all the walls to allies then you get an unrealistic situation, where a row of allies only counts for cover. Again, that comes from D&D's over simplification that running along edges of ally sqaures is somehow equivalent to open ground. Just like with D&Ds diagonal equality assumption, it works for short distances, but if you stretch it, you're bound to come up with a conundrum.
If it were me, I would house rule that 2 or more ally edges counts as that line of site being blocked for the enemy. But again, we are debating WAR, so I guess that's irrelavent for this discussion.
Overall, I think a few cases of iffy scenarios (what rule doesn't have them?), isn't enough to justify throwing the whole mechanic in the garbage. In real world gameplay, it gives the stealthy characters (especially ranged ones) more chances to actually
use their stealth skill in combat. It certainly is much more interesting than just standing in a flanking position.
And it encourages party cooperation to make it work, which IMHO is a good thing.
The only issue I see unresolved in all of this, is why they put in that you can't stealth behind allies if they're good enough cover to get superior cover from, which like the examples, would be like an arrow-slit. I guess it's because they're so mobile, that the enemy would catch a wayward arm or foot and notice you, as opposed to a stationary object where you can hide behind easily for awhile.
This has exactly been my point all along...allies aren't the same as static obstacles, so the cover (for the purposes of stealth) that you get from them is only for the
initial moment.
In that moment, you must be stealthy enough hide yourself in a bush let's say (ie. the stealth check w/terrain concealment). But when you
are hidden, it would be unrealistic to allow the character to just move from ally to ally as if they are obstacles. Which is where the "to remain hidden" rule comes in.
Doesn't this all make sense?
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Anyways, that was largely in RAI discussion. But if no one has any furthur objections to the RAW of my proposition, I'm going to go ahead and edit the first post as the "conclusion" of this thread.