It's because it's simpler to insure "everything real estate" or whatever than to try to cut out exclusions for (relatively) cheap properties.

But if they noticed that they were paying out more than expected on these $500k deals, the insurance would change quite quickly.

The same thing happened with GA insurance - there was an assumption that airline pilots would be safer but it didn't really turn out as expected, because a 747 has a heck of a lot more "keep you safe" doohickeys and doesn't fly low to the ground much.