The seller is obligated to get the merchandise to the buyer. IMO, the offering of 'insurance' to the buyer is just like inflating shipping costs to add to profit. In this instance, you should replace or refund the amount paid.

There is a moral hazard in taking this approach. Some future bidder may be tempted to accept delivery and claim he didn't. You have to judge the liklihood of this happening when you get ready to ship. Duration of eBay membership, feedback rating, whether you've dealt with him before, and whether he is a club member are some of the things to consider. If you are uneasy, pay for insurance. Otherwise, self insure, and don't pay the quite high post office rates.