Thanks. That's right.
While I still haven't been able to replicate the block highlighting issue even since the first email in this thread, I believe this has always happened in verilog-mode only (also I am working in verilog-mode 90% of the time).
What's surprising is that switching to fundamental mode does not disable that behavior. Not knowing much about overlays, here's a question to you and whoever is reading this: Should the overlays for a major mode be cleared when that mode is disabled? Or is that what generally is done and recommended?
Kaushal
The overlays have a verilog-include-file property so they're most likely
coming from verilog-highlight-region (unless some other mode re-uses
that property).
John