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As an eBay seller I see both sides of the story. Anything of value or over-sized I pay for insurance out of my own pocket (profit of the sale) it is much easier than having to deal with situations like this.
The seller obviously thought that once the item was dropped off it was no longer his responsibility, his replies seem a little suspicious too. No way overnight without insurance is cheaper than ground with insurance and shipping companies always recommend insurance it's more revenue. In my opinion the seller was just being cheap.
Since the buyer did offer to pay extra for insurance and packing costs then there is really no excuse at all and the buyer should be refunded 100%, however the buyer should return the item on his own dime and packaged properly (no need to insure anymore).
Just my 2 cents.
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