On two of my systems (one multi-boots with WinXP, the other to another Linux installation) /var/lib/os-prober/ is empty.
On another system (actually a different drive on the same multi-boot machine) it contains the file 'labels'.
Yours sounds like you've tried to mount/had something mounted there at some point and grub-update is trying to use the remains of it (it's done via /etc/grub.d/30_os-prober).
First check that you don't actually have something mounted there with: mount and check to see that directory isn't referenced. If it is, then that's a separate issue which needs to be resolved first.
Otherwise, as root, do: cp -a /var/lib/os-prober /var/lib/was-os-prober then delete what's in the original os-prober directory, then try grub-update again.
_________________
Giraffe: a ruminant with a view.