I'll update this thread with new findings.
I haven't yet been able to recreate that block highlight. But here I get a similar highlight on a string, with flyspell mode off. I also switched from the default major mode verilog-mode to fundamental mode. And even then I get that highlight.
Here is the result of C-u C-x =:
I do not understand overlays very well, but it looks like verilog-mode or some minor mode created 5 overlays over the same region, and they did not get removed even when those modes were disabled.
