what is the proper protocol

I agree with many statements above. I would refund the buyer's money immediately once the shipping company has determined that the parcel is lost, and has committed to pay the claim. I would likewise expect a refund if I was the buyer.

I particularly agree with Orind - The seller owns the package until it's delivered. I've never understood sellers who think once the payment is made, all risk is the buyer's.

Finally, and obviously, once the refund is delivered to the buyer, it should be clear that the package if found is to be delivered to me.

I have to agree with Ditto - the shipping company will typically start a "search" that can take weeks or months to resolve. I had a lost package with Fedex, 2 months later they found it in the search phase (they said that paint had spilled on it and destroyed the outer label). If the package is delivered late the shipping company will deny the claim, and at that point the seller can only hope the buyer will either pay or return the package.

If I trusted the buyer I would go ahead and refund the money now, but I think it is reasonable to ask the buyer to wait until the search is resolved. The seller takes a big risk if the seller refunds the money while the package is still en route to the buyer.

Surprised there is any doubt on this -- the buyer pays, does not get what he pays for, the carrier specifies it is lost -- seller then reimburses buyer immediately -- ONLY THE SELLER CAN COLLECT on the loss. If the carrier then recants and denies that it was lost after saying it was, delivers to the original buyer and refuses to pay the claim, the carrier should be taken to court for incorrectly stating something that led to a loss.

I was the buyer in such a transaction and could not believe that the guy would just keep my money, refuse to sign over the parcel loss collection rights, then be able to DOUBLE collect from UPS. I initiated a PayPal claim, but before they intervened, UPS paid up and he paid me -- months after the transaction. Then he threatened a negative rating if I gave him one.

I wimped out with a neutral and explanation -- he reciprocated same. Bad bad business -- shame on that kind of weasel.

Unless otherwise negotiated, the BUYER bears the risk of loss during transportation. Therefore, the seller has no obligation to reimburse the buyer until he (the seller) receives payment from shipping company.

Just beware for international transaction as you have no recourse once money is returned..It is reasonable for buyer and seller to wait.. both parties should understand as risks cannot just be unilateral.. unless you are a big manufacturer who has added cushion for loss.. not small peanuts like me.
i learned the hard way losing over 3k..be careful out there..