1st argument) a node to insert 
2nd argument) a reference node - this is the node that the new node will be inserted before

The trick to using this method is that the OBJECT on which you actually CALL the insertBefore() method is actually the PARENT node of the reference node!  

INCORRECT:
$DOMNode_refNode->insertBefore($DOMNode_newNode, $DOMNode_refNode); 

CORRECT:
$DOMNode_refNode->parentNode->insertBefore($DOMNode_newNode, $DOMNode_refNode);

Note that supplying the same node for $newnode and $refnode leads to an E_WARNING ("Couldn't add newnode as the previous sibling of refnode"). For example imagine one wanted to make $newnode the first child of its parent by doing:

<?php
$firstSibling = $newnode->parentNode->firstChild;
// Bad:
$newnode->parentNode->insertBefore( $newnode, $firstSibling );
?>

This would generate a warning if it already was the first child of its parent, since $newnode and $firstSibling are identical. Easy to work around though:

<?php
$firstSibling = $newnode->parentNode->firstChild;
// Better:
if( $newnode !== $firstSibling ) {
    $newnode->parentNode->insertBefore( $newnode, $firstSibling );
}
?>

example to insert <newnode/> between <chid1/> and <child2/>

<?xml version="1.0" encoding="ISO-8859-1" ?>     
<root> 
  <parent> 
    <child nr="1"/> 
    <child nr="2"/> 
  </parent> 
</root> 

<?php 
 
$xml_src = 'test.xml'; 
 
// XPath-Querys 
$parent_path = "//parent"; 
$next_path = "//parent/child[@nr='2']"; 
 
// Create a new DOM document 
$dom = new DomDocument(); 
$dom->load($xml_src); 
 
// Find the parent node 
$xpath = new DomXPath($dom); 
 
// Find parent node 
$parent = $xpath->query($parent_path); 
 
// new node will be inserted before this node 
$next = $xpath->query($next_path); 
 
// Create the new element 
$element = $dom->createElement('newnode'); 
 
// Insert the new element 
$parent->item(0)->insertBefore($element, $next->item(0)); 
 
echo $dom->saveXML(); 
 
?>

Sorry, my previous posting worked only for the top node. Here the corrected version, which will work for any node:

XML
----
<?xml version="1.0"?>
<contacts>
  <person>Adam</person>
  <person>Eva</person>
  <person>Thomas</person>
</contacts>

PHP
---
<?php
// load XML, create XPath object
$xml = new DomDocument();
$xml->preserveWhitespace = false;
$xml->load('contacts.xml');
$xpath = new DOMXPath($xml);

// get node eva, which we will append to
$eva = $xpath->query('/contacts/person[.="Eva"]')->item(0);

// create node john
$john = $xml->createElement('person', 'John');

// insert john after eva
//   "in eva's parent node (=contacts) insert
//   john before eva's next node"
// this also works if eva would be the last node
$eva->parentNode->insertBefore($john, $eva->nextSibling);

// show result
header('Content-Type: text/plain');
print $xml->saveXML();
?>

Result
------
<?xml version="1.0"?>
<contacts>
  <person>Adam</person>
  <person>Eva</person><person>John</person>
  <person>Thomas</person>
</contacts>