Tim from Timmins, Ontario has a 2x4 constructed home with wood chips for insulation in the walls. He wants to know if he can leave it there and insulate over the wall on the inside or should he tear it all out?
Wood chips do insulate but only at about R-1.4 per inch. Fibreglass is 3.5 per inch and extruded foam insulation 5.0 per inch. (for more details check out my "table of insulating materials".) So if you remove the wood and replace it with ordinary fibreglass, you will more than double the insulation in the walls. But that is a lot of work and cost.
It might be better to check to see if the wood chips have settled over the years and simply top up under the top of walls and below windows. One way to do this with a minimum of renovation is to find a good ceiling molding that can be put in later. Cut out the wall behind where the molding will go, which will cover up your work without having to repaint the entire wall. Where the wood chips have settled below this line, slide "Vermiculite" into the wall, using a trough made up of a section of attic baffle. Then once filled to your cut-out, put fibreglass into the rest of the space. If you are planning on putting "foam insulation" on the wall and re-drywalling, you can make the cut-out anywhere you want on the wall.
So yes, the best job would be to rip out all the plaster and rebuild from the inside, but that is often not practical nor necessary.