It is her insurance company that determines adequate coverage, not the bank.... In California, the law prohibits lenders from requiring coverage in excess of the improvements on the property as a condition of a loan.
However, there are provisions in most policies that require the policyholder to notify the carrier of the estimated replacement cost of the property after all improvements are complete within 30 days of renovation. This requires her increase her coverage now in order for the insurance company to honor paying on a replacement cost basis if a claim is presented during or after renovation. Otherwise, she may find herself participating in her own claim.
Either way, seems to me she needs to forget what everyone else is saying and speak directly to her insurance person, after all the buck stops with them....(she might be surprised how agreeable they can be, depending on the company, of course).
Your friendly California insurance agent,
Kathleen