How is a time out for insulting someone overkill? If the rule has been in place for a few years now and it seems to be working well why change it now?
This question is worth answering, but I will answer it in general, not specifically about this case.
There are many factors that go into determining how rule-breaking should be handled, case by case: What rule was broken? How seriously? (Insults we've dealt with range from calling somebody a fanboy to using racial slurs.) Was it intentional or careless? Is this a first offense by someone who has not had previous problems with the rules or yet another rule broken by somebody who regularly disregards the rules? Did it produce a flamewar, derail a news thread, or merely inconvenience or annoy other users?
The bottom line is this question: How can the moderators best ensure that the user will not make trouble for other users in the future? The moderators work as a team to balance all of these questions and they follow guidelines for what to do when (guidelines that we are constantly fine-tuning). But it's the nature of the task that we have to rely on human judgment and interpretation, not hard-and-fast formulas.
The result is that we can't say that a certain type of warning (a post edited with a note, a post by the moderator, a private message, an "infraction", a short time-out, or a long time-out) is always appropriate for a certain type of rule-breaking.
About the "banned" message
We used to have a short "you are banned" screen that applied to both permanent and temporary bans, which many users didn't understand. We changed our terminology to say "timed-out" for a temporary suspension, and changed the message to a long explanation that some users don't bother to read carefully. Perhaps that's not surprising since their initial reaction to a time-out or ban is probably strongly negative; not the time to read the fine print.
The message invites them to contact us if they think the action was inappropriate, and we follow-up when they do.
We'll adjust the message again.