I can assure you that engines are covered by insurance.
Over the years I've had to make a few claims from prop strikes and the engines and props have always been covered.
In most cases they will pay out pro-rata on the remaining life of the engine. In one case I got a brand new engine for a half life one.
The way things are at the moment, with the 1970s era four seaters, an overhauled engine can be around 3/4 or more of the value of the whole machine. Sadly, many of them are now worth more dead than alive.