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davidcyclebackJay, if the buyer says the item was damaged during mailing, I don't see how he could get the payment from PayPal. As far as I know, PayPal takes the money from the seller if the item was not delivered or was a fake, not because of damage by the Post Office.
Also, if he told you the item was damaged during mailing, but used another story to get the money from PayPal (item was a fake or wrong item was sent), that might be fraud.
Lastly, PayPal is a private company with rules, not a court with laws. Many of their rules are unique to the company and extend no further than the borders of their business. If the auction and invoice clearly said the buyer was responisble for mailing damage if he or she did not pay for insurance, the buyer likely is still responsible for paying you. PayPal returning his money according to their rules, simply means the buyer will have to find another way to pay his debt.