Insurance is absolutely crucial, and when borrowing from lenders to complete a house purchase, it is compulsory. Lenders will not allow a loan drawdown without written confirmation that appropriate and sufficient insurance cover is in place.
Usually there is replacement insurance relating to fire, earthquake and other damage. Cover for contents go hand in hand with the replacement cover, but is not compulsory. Highly recommended though!
These days you really need a valuation of the home being purchased to set the correct and allowable amount of cover to be sought. Banks and other lenders insist on this and then check the numbers in respect of what they are lending in dollar terms against the potential insurance pay-out in the event of damage to your house.
Replacement cover gives all the answers. The lender wants to know its lending is secure, and your house has the ability to be rebuilt at best while covering the amount they have lent at worst.
While fire and wilful damage are the cornerstone of insurance cover and why it is vitally important, these days earthquake risk is also on everyone's minds and must be included when arranging such cover.