I actually think it's a gray area as to liability when the knife is transit - and this is where BF mod's clarification is helpful.
Suppose the buyer sends funds, and then the seller faithfully wraps the product up in nice bubble wrap, puts the correct address on the package, and then pays (and trusts) a delivery service to deliver the package. It seems like both parties have done their jobs.
But any number of things can go wrong, some malicious and some just unfortunate:
(1) Seller could claim to have shipped a package but not done so (and maybe even invented a tracking number)
(2) Buyer could receive a package but claim he didn't
(3) A package could legitimately get lost by the delivery service
How to address these?
Mods' clarification in the rules and earlier in this thread indicate (at least to my read of it) that they hold the seller responsible, so the seller should purchase insurance on all deliveries, and -- in the event of 1, 2, 3, or something else -- is responsible for returning funds to the buyer and dealing with the insurance claims process. In the event that the seller doesn't return funds, the buyer can complain here on BF and seek compensation from Paypal. For any one bad transaction, the delivery insurance or PP's G&S insurance should make both parties whole. In the long term, a scamming buyer or seller should be discovered by the BF community, by PayPal, and/or by the PO and hopefully prosecuted.
Even so, one final bad scenario to contemplate is this: Seller ships with insurance. PO says they delivered the item. Buyer says he never got it (maybe he did and he lies, maybe someone stole it from his porch). Now seller doesn't have a knife, buyer claims he doesn't have a knife, and PO says they did their job by delivering the package and so insurance doesn't kick in. Then what? It seems like someone has to be the default party to pay up, and mods are indicating that it's the seller.