Let's be sure that I know what you mean: You request a file hello.omg at http://localhost:8000/heLLo.omg and with case-folding turned on, it would still serve it?

Correct. This is fairly common if you have a server on a Windows host and try to migrate it to a Linux host. There are some file systems on linux which do support case folding, which does fix the issue, but not all file systems supported.

What would the interaction be on a case-sensitive filesystem with this option turned on? If there's a dir with Hello.omg and hellO.omg, which one would be used? Do you know of any webserver that does this so we can look at some prior art?

I'm not sure if there are webservers that do this, and which one it chooses may entirely be up to miniserve to figure out (possibly even with a flag that swaps between lower first or upper first?) as for "prior art" the closest example I have is this python script which starts the http.server with case insensitivity.

case.txt