You are liable IF you knew about the insulation but, despite knowing of it, failed to disclose that fact; failing to disclose a known issue (particularly one like this, that could not be reasonably located or discovered, since the buyer and his/her inspector are not going to tear open walls to check) is fraud. In this case, you'd have to pay for the insulation--at least if she sued you, so you might want to voluntarily work it out with her without the need for litigation.However, if you did not know, you are not liable; fraud is based on the knowing or intentional nondisclosure or misrepresentation of information. So if you did not know about the insulation, you are not liable and do not have to pay.