What happens when the selling value of your house goes down and your insurance doesn't. Your inusrnace is based on the replacement cost of your home not for the amount you would get in a sale.
Here is one amazing example: Insured is buying a new residence and is paying $942,000 for the property. It is a beautiful home in a nice neighborhood. The home is custom built and has all the bells and whistles. Cost to rebuild is $200 per square foot as a conservative number it might even be a touch more. The home is 6000 square feet. The math says the home will need to be insured for $1,200,000 or $258,000 more than the buyer is paying. So the dilema for the buyer, why am I buying more insurance than what I paid for the whole property?
The answer is fairly straight forward. If the home burned to the ground it would cost more to replace than the purchase price. The insured wants the home he bought rebuilt the way it was and therefore the increase in the insurance value. This will be an ongoing issue until the home prices rebound.
This also has a secondary effect on the real estate market. Bareland just isn't moving, well at least in Central California. When you can buy the finished product for less than the cost of building, unless you have something very specific in mind it pays to buy the already built property.