Did you pay through PayPal using a Credit Card?
If so, send a letter to your credit card company and request a chargeback, stating that the merchant took your money and never delivered the item. Further, that the merchant is now claiming that the item was lost by USPS and was insured for full value which they told you they would be filing a claim for.
So as of right now, the merchant has both your money, and money from the USPS for the lost item, which appears potentially to be to be wire fraud.
As such, because the merchant has received a double-payment, a chargeback would put you and merchant back to the same position prior to your attempted purchase.
If you used Paypal via a cash transfer, your only recourse might be to file a complaint of Wire Fraud with the FTC, FBI, and USPS Postal Inspector.
Also, Im not an attorney, and never played one on TV. The reader will fully assume the risk for any and all of the preceding. Your mileage may vary.