To be eligible for PayPal Purchase Protection you must meet all of the following requirements:
Pay for the eligible item from your Account.
Does this mean in order for a purchase to be covered (non-eBay) I need to have the money required for the purchase in my PayPal account
I'm about 99 44/100% sure that "account" here refers generally to your PayPal account, not any funds they may be holding (those, I believe, are referred to as an "account balance," or somesuch, pretty consistently).
I agree that the wording is real weaselly, and I'm not surprised you're getting the runaround: it's the kind of question that sends smart customer service reps diving for cover. It may well be that only way you'd ever really know would be if a dispute arose.
If in doubt, you can always transfer the requisite funds to your PayPal balance. One thing is almost certain: you won't get a definitive answer from anyone who isn't a PayPal attorney and, even then, I'd want a piece of paper with someone's signature on it.
Hopefully someone who's actually gone through the dispute process will chime in.