Hi, this is Jim, thank you for the question - I will do my best to resolve this quickly for you.
Sorry to hear of the issue. You do not have to refund them. After 6 months the burden shifts to the consumer to prove the product was faulty, not you as the retailer. They can sue up to 6 years from when they say their consumer rights were breached but they need supporting evidence if they have any hope of winning a claim.
The item was also insured so it's not known why they will not use the insurance. As it stands you do not have to refund them. They are well out of time to reject the item (which must be done within 30 days).
If they do sue, you will receive court documents (a response pack) which you must complete and return to the court. It is a tick box exercise for the most part and there is a short section to write a defence which is easy enough though please feel free to come back to this site if you need any more help. A claim will also take 6-12 months to be decided at court. If you lost then you would get 14 days to pay the judgment before the claimant can enforce the order, and 30 days to pay in full before it is registered with credit agencies. The claimant cannot recover legal costs if they win, in a claim under £10K (a small claim), all they can claim are the court fees and interest.
I can assist you going forwards if it gets to the point they issue a claim. Once you file your defence you can consider an application to strike out their claim - as it would have no merit in my view. I can give you the details of how to apply when the time comes. In the meantime you should reply to the customer to refuse the refund, you are not under any obligation to do so, they have insurance to avail of too and tell them they need to prove the item was faulty from the outset given more than 6 months have now passed. I don't know their reasons for returning the item but presume it's because they allege it was faulty.
I hope this helps and answers the question which is easy to understand - please feel free to ask me anything else. I will reply as soon as I can to help with any further queries.
Thanks for using our services and have a good day,