Apple insures their shipments, right? They should at a minimum hand him the cash back that it was insured for, since they should be getting that from UPS. Sounds like they are trying to keep that cash and give him the cash equivalent in a used (or possibly new inventory saved for replacements) AL AW that he doesn't want. They arranged the shipping; he has no ability to file the claim with UPS and get the insured amount back.
The right thing to do in order (If option 1 is impossible, option 2 or 3 should be left up to the OP):
1) Provide a Ceramic AW of the same year model, refurbished with a new battery
2) Provide the insured amount received from UPS (likely to be delayed as the process plays out)
3) Provide a Ceramic AW of a newer year model (or one at the same initial price point) that they do have refurbished with a new battery.
To me, providing a newer(est) AL makes no sense...