You've pretty much got it right. Wait for payment, then you can go to your "transactions" in Auctiva and purchase the insurance separately. After that, you have the option of emailing the proof of insurance to your buyer (it's not done automatically). It's easy, since you can do it from the same screen, basically.
I believe U-PIC (the insurance company that Auctiva uses) is of the philosophy that putting an "insurance" stamp on the package is akin to writing "steal me" on the package. It'll just make it a more attractive theft target to postal employees (or others).
If you want to refund her the nickel, and she paid with PayPal, you can just go to the transaction detail in PayPal, scroll to the bottom, and you'll see the "refund payment" link. It'll allow you to refund a partial payment (you won't get charge extra fees, and it'll refund fees too, if applicable).