Is it obligatory to distance oneself from the family if the father sexually harasses the grandchildren and the mother refuses to disassociate from the father, claiming he is ill and not safeguarding the grandchildren's honor?

Undoubtedly, what your father did to his two granddaughters is among the gravest of major sins, and it is impermissible to allow him to be alone with your daughters, or with any other unmarriageable kin (mahram) besides his wife. Obedience to your husband in matters that do not involve disobedience to Allah takes precedence over obedience to your parents. His keenness to protect his daughters and prevent them from your father is his duty. Do not cut off your family and your mother. Try to maintain ties with her by inquiring about her, contacting her, and visiting your parents in their home. Your husband has the right to prevent your daughters from their grandfather and from visiting his home. If a visit for your children is arranged thereafter, it must be in your company or their father's company. If you strive to maintain ties with your parents and they do not accept and insist on cutting off ties, then there is no blame upon you or your husband.