As for the $11, I did not give that back because I changed my mind about selling the knife to Eric and he knows this. I asked for the knife back and he refused and we have not gotten along since then. I did not want to do business with him and simply wanted my knife back so I was willing to pay for every penny he spent along with his cost for USPS money order and shipment of the knife back to me but he refused. Everyone keeps saying a deal is not complete until both party is happy, well I wasn't happy and wanted my knife back!
You had a contract whether you realize it or not and it was not your position to unilaterally break it, but to honor your end of it. Once the money was received and the knife sent and received, the buyer owned the knife. He had no obligation to return it to you since he paid you for it. He also paid you for something you didn't provide. You owe him a refund for the insurance you took money for and did not buy.
The best thing you can do when you find yourself in a hole, and believe me, you are in deep, is to stop digging. The more you evade, rationalize, obfuscate, and generally act like a douche bag (and nearly everyone here seems to think that is exactly what you are), the more it is going to hurt your business...How many people in this thread have said they would never buy from you after reading this? How many sales have you lost? I bet more than $11 worth....