Joiseymom, I understand what you are saying. There are some kids I have known, including 1 niece, that just caused so many problems that I can hardly stand them. The niece, fortunately, has benefited from counseling. It is difficult when dealing with family b/c you can't just easily walk away from them.
A child called me numerous times on my cell phone to ask if she could come to my DD's 10th birthday party. She was not invited. I assume that she got my cell phone # from her mom's phone. She used to be in my GS troop, but she quit. She is a handful, the kind that you can't hardly trust to turn your eyes from for a second b/c who knows what she will be destroying. Someone who is just walking chaos, and can get other kids are rowdy as well. I didn't want that at the birthday party. So, I chose not to acknowledge her phone calls. I had told DD to only invite kids that she likes, that like her, and won't cause a bunch of drama. The birthday party was the best ever. All the kids got along GREAT.
But, with family, it's not that easy to just ignore the phone calls, ignore them at family gatherings, etc. They are still family, like it or not. I agree with your blessing for your DD to give it back to her. It's a danged if you do, and danged if you don't situation. Sometimes in life, you have to choose who to make mad, whose feelings get hurt. Sometimes self preservation has to come first. Why should your DD just always be taking it taking it taking it when her cousin gives her crap? Bullies aren't going to just suddenly say "You're right, I'm so sorry". I don't believe in instigating anything, but if the niece starts in, I think that you DD has the right to defend herself verbally.
Good luck!