The TOS sounds like it's just
ebay and PayPal covering themselves leaving their options open with how to deal with things.
It's not a terrible policy since you kind of get what you're asking for asking for no tracking shipping, but it does clearly say for lost or damaged items. If an item shows up damaged you can prove that. However, you can't prove a lost item was ever lost. Without tracking there's nothing showing it was ever shipped and USPS isn't going to say yea we probably lost it our fault.
Like mentioned it will just get treated as if it was never sent since there's no proof it ever was.
There is one instance where I could think where it actually would apply. International shipping usually only has tracking to your countries boarder without paying extra. If the tracking shows it getting to an international hub then it's never heard from again because the buyer didn't want the international tracking you might be covered.
Always use tracking though unless you're willing to just send that item to someone for free.