If they're two home owner policies on the same building and loss occurs, what happens? Does the policy with the higher limit pay in excess?

Usually only one exists, which is the one that was purchased last. Otherwise, the one with the lower limit usually pays first, and the second picks up any excess, which the second is often called an umbrella policy, because it picks up where your regular policy leaves off. Umbrella policies are very common, where someone may have multiple liability policies and the umbrella takes the lower limit and covers all of them to a much higher limit.

The two policies share in the loss, usually on a pro-rata basis.