How can I wire an Insteon switch in this situation?
Is this a the 3 way switch? That is are there 2 switches in the house that control the same light? If so, you will have to replace both with insteon's for it to work since they will communicate wirelessly. Assuming it's a 3 way, make sure the switches to the light are turned off, since if they are on, some wires will appear hot when they really are not. Assuming the above photo is with the switches off, you have one wire labelled wire and you mention the line is always cold. You have that backwards. The line should be "hot".

The black wire on insteon is labelled line and that should attach to the two hot wires and the black cold wire (which is actually the traveller) should be capped off and cap off the red load wire coming from the insteon.

The other 3 way switch should have the hot wire attached to the line, and one of the wires should be capped (traveller) and the other should go to the red load of the insteon. 

Page 11 of the Insteon instructions illustrates this as well. http://cache.insteon.com/documentation/2477D-en.pdf