When I sell something on eBay, I specify that the seller pays actual postage, I do not charge any "handling fees". I say that insurance is optional at the buyer's risk. I think that this is the fairest possible way to handle shipping charges. I could enforce that insurance is mandatory or I could charge a flat shipping charge that includes insurance. I think that my method is fairer.

If you offered the buyer insurance and the buyer refused, then it is the buyer's responsibility. I would not issue a refund. However, you need your terms and conditions to be real clear up front.