The IMPLICATION with PayPal is that purchases are fully protected.
PayPal then explicitly say that they don't guarantee refunds off-eBay if they can't obtain the funds from the seller. This is of course stated in the Buyer Complaint policy page - "However, recovery of any amounts is not guaranteed and is limited to the amounts that PayPal can recover from the seller’s Account, even if PayPal makes a final decision in your favor."
However, consumer legislation overrides company policy. Company policy overrides individual terms of sale. It's a decreasing series of enforceable obligations and rights. You'll notice that a seller on eBay, for instance, has nothing on which to stand if his TOS state "No refunds", and the buyer lodges a SNAD claim. The seller's TOS are superseded by eBay's policies. eBay too tried to enforce something which was against Australian legislation - PayPal only as a payment method - but that could be stopped because Australia's consumer legislation wields a bigger stick than eBay's/PayPal's company policies in Australia - in other words, it's more enforceable, as long as people are prepared to push the issue. (Same principle with seller TOS - such sellers can include silly TOS in their listings, and a lot of buyers might take the words of the seller to mean there's no recourse, but push the issue and you can find out how unenforceable the seller's TOS are.)
All of this just means that PayPal may be subject to legislation in the US which overrides PayPal's policies - if push comes to shove. I don't know... You'd need to check the legislation to see if you have any consumer protection.
After all - and here's the thing that I consider particularly culpable - PayPal are relying on a "get out of the responsibility" disclaimer that is not displayed clearly at the point of your purchase. You are NOT told when paying, "PayPal will not protect you if there's a problem with this purchase, unless PayPal can recover the funds from the seller". PayPal have something to which they can point after the fact, saying, "See? Our policy is that we don't cover the purchase cost", but they don't inform you, the consumer, sufficiently at the POINT OF PURCHASE.
This was enough in the case of Evagora vs eBay, and it may be enough in any instance of fraud where payment is made through PayPal - if you push the issue.
NOTICE: This thread is temporarily pinned at the request of Telloman, as it is an "active file" requiring helpful input.