Nor Cal has recently gone through a spate of large wildfires incurring billions of structural damages and total losses.
Working in the construction world I've heard several stories of Insurance companies not paying full replacement costs and the explanation generally includes all sorts of failures of the insurance company to "fairly settle".
I'm not saying it's the case with the o.p. situation yet digging on the local issues I've heard generally yields the property was not fully covered. Either the property is not insured at current value, insured for replacement cost, or for building code upgrades. Another issue I've heard repeatedly is a small home is added on to repeatedly and upgraded finishes and accessory buildings added without listing them on and included in insured premises. Lastly, unpermitted construction is both difficult to prove quality and or that it actually existed.
I have seen almost no problem with people having their homes replaced if they have all construction permitted, on the tax roll, construction replacement value and building code upgrade endorsements, and pictures of everything (finished and appliances, belongings, if insured) in the hands of their insurance agent (and a safe deposit box).