Look, you folks can argue this point until the cows come home. I suggest you look at the reality of what actually happened in this situation and take careful note.

Review:
1) Chip was sold
2) Buyer paid
3) Chip was shipped, under insured
4) Chip was lost by USPS
5) Buyer claims that the city and zip caused a problem before, but he hasn't fixed it. (but if the zip is right, the USPS doesn't look at the city, they don't care. This part still confuses me)
6) Paypal says, sorry Charlie, you must use shipping with tracking.
7) Buyer gets money back
8) Seller gets back $100 for $500 chip, minus expenses and shipping.

Conclusions:

1. The shipper is responsible for getting the item to the buyer, even if the buyer under-insures his own purchase.

2. Include enough shipping AND insurance fees in the auction to cover the actual value of the item sold, rather than expecting the buyer, who has nothing to lose, to pay the required fees.

3. Lost chips in the postal system go to the same place as that other sock that you only had one pair of, and vanish forever.

Actually #3 bothers me the most. We seem to have quite a few lost chips in the mail, but bills, checks and letters seldom get lost. I wonder if little bubble mailers are easy targets, with a red flag saying "steal me".

4. Paypal and other credit cards protect THE BUYER not the seller.