So, looks like in my situation zero clearance does not apply, because the liner will be inside of my existing masonry chimney, which already can accept fireplace fire, so liner insulation does not seem to be needed by the code. But my argument was that since we're insulating it anyway, we should go by the manufacturer instructions, which mentions 1/2" insulation. We were about to order 1/2" insulation, but then they asked if I still with to use a pre-insulated liner to make it easier for them. I found a 6" pre-insulated liner for $500 more with free freight shipping from Woodland Direct and we decided to use that instead to avoid the pain of insulating. I know it's more money for me, but I thought that it would make it easier to install and less prone for snags/tears, so eliminating some risks there. I was on the fence, but Woodland Direct have a $100 rebate, which helped with the taxes, so I went for it! I then found a cheaper version at fireplace-chimneystore (1350 vs 1850 at Woodland), but wasn't sure about quality and reputation of the store, so sticking with former for now.
I have one more question though. The installer offers 2 ways for sealing the bottom: metal block off place vs so called ThermaFiber insulation of the damper area. ThermaFiber appears to have better insulation properties, but I just wanted to check with you guys, what do you recommend from your experience? Thank you.