How does fire insurance work?

My fiance's parent's, my soon to be in-laws, had their has burned to the ground yesterday afternoon. They lost pretty much everything going back decades as well as heirlooms from passed relatives and every photo album that's important.

Bill, my father in law, has been paying fire insurance for 20 years. I'm not able to attend the paperwork session due to my job (with the insurance company), but generally speaking, what happens?

I've yet to experience home ownership but that will change soon, but that doesn't mean I know every single in and out thus far, which is why I'm here.

Is the house that burned down paid off?
Does insurance cover the cost of a new home of equal or lesser value?
Would their mortgage restart at the same price but with a new house?
What else happens with fire insurance?

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