Unfortunately, the bank holding the mortgage would almost certainly be the loss payee on the insurance policy, so all the poor schnook would get would be personal property to the extent of the insurance on that ... which except for a few companies that issue replacement coverage (like USAA for us veterans) is not even close to what they'd lose. Even replacement coverage only covers things to a limit, and most people don't have the personal articles floaters to cover their serious valuables (art, jewelry, silver, computers, musical instruments, etc.). It would be a VERY DUMB DARWIN CANDIDATE who set a wildfire to get out of a bad mortgage - bankruptcy would be less painful!
Not to mention that California canyon country is hardly the place that people who were credit risks could have even THOUGHT about buying a home.
Perhaps a flipper could have got caught with his pants down, but his scenario is highly unlikely.
Thankfully, I am not one of the poor schnooks! I have so much coverage, my insurance agent is on speed-dial. I up my contents coverage reguarly, pay the higher premium for replacement cost, have riders for my jewelry, my computer, my data, my fur coat, my precious documents, with an umbrella, plus life policies on my three children, myself, and my spouse. I even bought identify theft insurance, to cover expenses up to $25K if someone steals my identity.
People think I am over-insured, crazy even.
I spent almost a decade helping people recover from disasters large and small. I know what happens to folks who are underinsured. My family also knows what it is like to bury a child.
I'm not crazy...I'm experienced.