We have a stone fireplace with the chimney going up the outside wall of the house. There is a fireplace insert to make it more efficient and the stone gradually warms up around the fireplace but the stone chimney is also conducting a lot of the heat to the outside. How can we make this more efficient? Can we insulate the outside stone some how so the stone serves more as a heat sink for the inside of the house?

Your concerns for heat loss are well founded. It is a long established fact that chimneys that are located on the exterior walls of buildings are less functional than chimneys located inside the building envelope. For instance, it is likely that your chimney has three sides that are exposed to cool outdoor air. The exposed concrete or masonry walls of your chimney wick heat from the interior of your home to the outdoors, reducing the energy efficiency of your home and ultimately increasing your heating costs.

 As well, because your chimney is a cold thermal mass, it cools the hot gases and smoke from the fire as they come in contact with the chimney flue liner on their way to the exterior environment. Cool smoke and flue gases leave significantly more sooty deposits on your flue liner than smoke that remains hot in the flue liner. Chimneys that are located inside the building envelope keep flue gases and smoke warm, and therefore, these inside chimneys create less creosote and soot. Another intrinsic advantage of an inside chimney is the heat sink effect you mention in your question. The thermal mass of a chimney absorbs heat from the fire and the ambient house air. This heat is stored and released over an extended period of time long after the fire has died. This stored heat moderates the house temperatures by leveling the highs and lows of the ambient house air temperatures.

I think your idea to insulate the exterior walls of the chimney is a great proposal. First, have your chimney inspected for internal cracks and defects by a certified “wett technician”. You may consider building a wood-frame or steel stud chase around all three sides of the chimney, tightly secured to the existing exterior walls of your home. Construct the chase with liberal wall cavities to permit a large volume of insulation. Consider using a non-combustible high R value insulation like “Roxul” from the Grand Forks slag debris. Check with your local regional or municipal building inspector to confirm required clearances from the chase to the original chimney and be sure to extend any existing fresh air intakes through the new chase.  This chase will definitely help capture and keep the heat from the fireplace and your ambient house air inside your building envelope.