You're watching a horror movie late at night. All of the main character's friends are dying by the hands of a psycho with a sharp object. (Already sounds like a unique plot, right?) Then the big twist: Your beloved, though slightly annoying hero, is crazy and he is doing it.
What was an original concept, is now as overdone as a cookie baked for 12 days. It smacks you in the face practically screaming, "Gotcha! To waste your time, that is".
I believe it is even worse when it happens in a book. You spend more time with the character as a whole, only to be lead down a dissatisfied path.
I have read three books lately that used mental states to confuse or destroy perceptions. In one, it is never clear but leaves you enough evidence for you to decide. The next book gave the readers the answer but let the only two characters that knew the truth die so no other characters know; since many people had a lot riding on the outcome, it was frustrating at best. The last story didn't even entertain the notion of insanity until the very end pages and, since I was rooting for her, I felt betrayed.
Please don't use this plot device! There are so many GOOD ones out there. If, for some dark and sad reason you must, make sure it is as varied as possible. You don't want a legion of frustrated readers throwing copies of your books at you during a writer conference.
Have you come across a lot of "insanity as plot"? How did you like/hate it? Would you use it in your own stories?