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USPS says delivered, but wasn't


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I sold a putter to a fellow WRX'er at the end of March, tracking stopped on 3/29, it said late on 4/2, and then basically fell off the map.  I filed 2 different search requests on it (both filed incorrectly) before it was "found" in Cincinnati (should have gone from Raleigh to Phoenix).  The buyer sent me a picture where they had the label part of the box cut out and just delivered that along with a note saying they regret that the packaging was damaged.

 

How would you all handle this?  I'm suspecting that USPS is going to tell me that the package was delivered and that they will not pay out the insurance on this.  Should the buyer file with Paypal?  From what I'm reading, I should be able to get seller's protection on this since I bought the shipping through Paypal, the tracking shows it was delivered, and I have the receipt showing it was dropped off.  Suggestions are appreciated.

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First thing you do is refund the buyer. Then file your claim through USPS. 

Right thing to do is refund the buyer. I had to refund an $850 putter and only get $50 back from insurance. Sucked but also taught me a lesson to insure the stuff that hurts the refund. 

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