A quick two word answer-"it depends". There are as many answers to this question as there are variations on your insurance coverage. This question is really more for your insurance agent than your Realtor. Generally speaking most mortgages contain a clause specifying what type of coverage is required, and dictate the terms to the insurance company. Needless to say, besides your name on the policy your lender will also be listed as "Name of Insured".
This is why you cannot close a mortgage without suitable insurance. But back to your policy. It generally states that the mortgage either gets suspended and the paid money claim escrowed while the home is rebuilt. This is not always the case. Some insurance companies pay a lump sum to settle. Everyone needs to review their homeowners policy for the answer. Many exclude certain types of disasters. So heads up if you live near a Nuclear generating facility. Or an earthquake fault.Or within the flood plain of a river or lake. Depending on the history of your particular neighborhood, you may be surprised to find some type of disasters that you consider common, like flooding from the local lake, are excluded.
