Yes, clicking the command does highlight it as you described.
Confirmed this is still occurring as of Build 3.6.20250711-nightly.

I also confirmed that the issue persists even after running "defaults delete com.googlecode.iterm2" (stable and nightly)
Moving my ~/.zshrc out of the way and reinstalling it2 shell integration actually resolves the problem. So I guess the problem is something in my environment. I'll try and find out what in there is causing the problem in case it's of interest to anyone.
Thanks