I always include insurance in the S&H. The way I see it, the insurance covers my ass too, not just the buyer's. I sold a set of custom Stave drums to a guy last year and UPS destroyed the bass drum as in the box (and this is from the builder) had to have been dropped from 7-10 feet in order to break the shell in the way it did. The buyer filed a dispute before he even told me what happened and allowed me to file with UPS. He did this in order to cover his ass in case *I* decided to screw him. Then even after I told him that UPS was going to honor the claim, the very last day that he had to escalate it to a claim before the dispute expired and I would have been relieved of all responsibility, the bastard escalated it to a claim, again as protection in case I decided to not send him the check or something. Only after I spoke with UPS and made it so the check would be sent to him and they would deal with him directly (effectively removing myself from the process any longer and putting it all on him) he dropped everything.
But, no matter what you do, PayPal doesn't care if the shipping company was at fault. They view it as 100% that the buyer did not get what they paid for and that's that.
Even despite their ridiculous 21 day hold policy, I still sell only because I feel like where else am I going to? Forums have never worked out for me.