It's a tricky situation. People who use the narrative to insult people have to be careful not to accidentally let the narrative shots cross over into OOC, and also remember that some people may see certain types of narrative shots as OOC and take issue with it even where others did not, but I've seen a lot of people who are able to use the tactic very successfully.

As for how to address those kinds of narrative insults when they happen TO you, you're correct that you have to be careful how you respond because if you end up responding how your opponent hoped you might, they could already be waiting and ready to use it against you and make you look crazy or stupid. There ARE a couple of safe, almost surefire ways to react and address such things without falling into a trap, but I don't like to give too much away. Think outside the potato sack and it may come to you.