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You are placing the smart chip on top of the smart chip holder. It's a little metal square where the smart chip should go. Lift up the metal square and place the smart chip underneath. I had to go to my local AT&T dealer to figure this out.
You have to insert the smart card all the way in on these phones. You can use a pen cap or something to push it all the way in there until it goes all the way in and click and stays there. Then it will not say " insert smart chip" anymore.
I have the same phone, and was getting the same "Insert Smartchip" message.
I seem to have fixed it by taking off the cover on the back of the phone (the part with the Sony Ericsson name on it), taking out the large battery, and gently pushing the little blue Smartchip back into its chamber with my fingernail, as it must have come loose somehow. The Smartchip "clicks" into the chamber when it is in there correctly.
I put it all back together, turned the phone off, then back on. When it came on, it worked again.