It's my understanding that if a merchant has a chip reader and a chip card is used for purchases there are no chargeback rights to the merchant for unauthorized transactions if fraud is reported by the cardholder.

I know anything is possible, but can a chip card be duplicated and used.

A cardholder submitted a claim of unauthorized transactions for Chip on Chip and states that their chip card is in their possession. Can a Chip on Chip dispute be denied if cardholder states card is in their possession? If so, what language is use for the denial letter. or must the financial institution eat the loss for chip on chip when the chip card is in customers possession?

No. This does not demonstrate that your customer performed the transaction. Someone could have taken their card from a wallet or purse and replaced it. A counterfeit card with a fake chip could have been processed as a "technical fallback" transaction since the fake chip would have failed.

Unless you can demonstrate that no error occurred, then you are responsible for the loss. Absent a chargeback option, your only other investigative tool would be to contact the merchant to see if there is video evidence of your customer performing the transaction.