They don't pay to replace the land. ;-)

That said, lots of policies cover replacement costs - so if your place has a $300k mortgage, is appraised at $200k (with land) due to the depressed market, but would cost $250k to rebuild, then the insurance check would be for $250k. You would still owe on the $300k mortgage. The house only guarantees the mortgage - the bank effectively doesn't care if it's not there any more, they'll still want their monthly check. They just have trouble getting the check if the house isn't there....

At least that's my understanding. Corrections welcome.

Cheers,
Scott.