What if he bought the car for $7500 then spend another $5k to repair some mechanical or body damage, he will be out of pocket if it was a right-off and they paid him $7500.
The reason insurers will only insure for the purchase price is so people don't buy a bomb worth $5 k, insure it for $20 k then they have the car stolen , burnt whatever ...
So they will ask , how much you paid for it then they have price range on their books for that car/model , if its under the range they want to look at the car so they can see its in good nick . If its over the range they may say to you we can only insure it for the purchase price . If you tell them its in mint condition and very low k's for that model then they may cover you but will usualy want to inspect it .
All the above is from the big mainstream companies and for Australian delivered cars, most of these companies will not insure used imports ..