Playback standard controls what will play back at all. If set for DV and you have an HDV clip, then the HDV clip will not be output (and vice versa). DV Output controls what goes out on the firewire. If it's set for HDV/DV and you have a DV clip, then the output will fail as it has to switch on-the-fly, and Liquid will mis-read the output. If it's set for DV Locked, then HDV will be downconverted to DV, and DV will output normally.
I never mix CODECs on a tape, so I set Playback Standard to match the tape rather than use automatic, and I set DV Locked if I want a DV clip (regardless of tape format).