Cindy -- the "Insert Image" button only works when you link to an on-line image. So to add a chickie to your sig line (not as an avatar), you need to copy the URL of it from the avatars list (right-click on the chickie, go to "Properties" and copy the URL from there). Then use the icon on the formatting menu that looks like a postcard of a mountain and a sun. Click on it. It says [IMG]. Paste in the URL and click "close current tag".
If that doesn't work, let me know and I'll try to explain better.