We have a 1700sq ft house, and we have contents insurance for $200,000 CDN.
My Dad just went through an insurance claim for his basement and garage (which had no actual furniture in it, just the stuff in storage/tools/old fishing gear/holiday decorations) and his claim with insurance was over $28,000, not including the furnace and hot water heater/all the electrical stuff.
He was lucky that he didn't have to replace his whole house, like some people in the town where he lives, but it really can add up quickly. We don't buy lots of stuff, but we do buy quality things (and have received quality hand-me-downs for our future kids, which we are storing in our crawl-space until we need them). Insurance insures the purchase cost for replacement, not the cost that you could get something at, by shopping around, and buying used.
I am likely over-insured slightly, but in this case, since it wouldn't cut our premiums much, I am just going to leave it. DH has a lot of woodworking tools, and I have my Mom's jewellery (not worth *that* much, but still could add up quickly).