you keep saying "there was no transaction", you need to look up what the word transaction means. postal insurance has nothing to do with the paypal transaction
Perhaps you should look up the word "gift". Here, I'll do it for you, as well as transaction:
Transaction:
: a business deal : an occurrence in which goods, services, or money are passed from one person, account, etc., to another
: the act or process of doing business with another person, company, etc. : the act or process of transacting business
Gift:
: a notable capacity, talent, or endowment
: something voluntarily transferred by one person to another without compensation
: the act, right, or power of giving
Now, if the money was paid through paypal gift, there was no transaction. End of story. The only possible ramifications for the seller would be bad rep here, which some would say he has gotten anyway even if it was paid through goods.
Further, If it was not a transaction (IE a gift) the buyer has no right to the insurance collected. Again, a BS move by the seller but technically not wrong. It will get him bad rep here though.
I fail to see what PayPal (gift or not) has anything to do with the seller refunding the buyer as well as USPS insurance. It could very well have been a cash-for-goods for what it's worth...
Please see the above for a description of how insurance relates to a gift payment vs a goods payment. If it was a gift payment, the buyer is under no obligation enforceable by the authorities or the backing financial institution to refund any money. It may make him a DB here and get some sort of infraction or banishment but in real world there is nothing more to be done. That is why we always say don't use gift.
And more to your point of how he could have point, we have no idea how this transaction was conducted. That was my original point. If the buyer can't even comment on the basic information on what happened, why should we be pounding our chests on one side or the other of this problem.