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() (1) Always make your payment either directly by credit card or funded by credit card (PayPal). I hope you used a credit card to pay for your auction item. You should always be polite at the start of a problem, then escalate it to a PayPal dispute, but if worse comes to worse, your best friend is the charge back.
(2) Even if he says in his auction that "insurance is optional; I am not responsible for this and that....," I always ignore that and don't pay for insurance if I see that big green PayPal insurance logo in his auction saying I am insured up to $200 or $2000. That green PayPal thing TRUMPS his "insurance optional, beware...." thing in his auction description. In the past I would email the seller and explain that I was covered by PayPal, but it was never appreciated, so I just keep quiet now. Actually, in any deal the seller is responsible for delivery and you can do a charge back or sue if the item is not received if you paid via credit card (but see (3) below).
(3) It is up to the seller to set the terms of the deal/auction. He has the right to say that it must be insured, that the buyer must pay for the insurance through the shipping and handling charges. But this "optional" thing is a joke, to me. It is the responsibility of the seller to have proof that the item reaches you.... ....... ....... If it was a non-auction deal with a club member or some similar individual (that is, not a commercial eBay auction, for example), I would go over the insurance matter with the other person before sending money or merchandise.
(4) As a buyer, you should leave a neg. feedback, especially now since the seller can not leave negative or neutral feedback (recent eBay rule change).
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