In mne-python's representation of 'cov', the standard covariance `FIFF.FIFF_MNE_COV` causes `cov['diag'] = False` to be set, whereas `FIFF.FIFF_MNE_COV_DIAG` causes `cov['diag'] = True` to be set -- see lines 82 - 131 in `fiff/cov.py`. Also note the equivalent write operation in `write_cov` on lines 163-164. In other words, I think I already did what you requested by setting the `cov['diag'] = True` option on line 116...