Are you in trammel? And to be clear, even in felucca, a grey player will not flag on a blue player via indirect damage unless the blue aggressed the grey first. From your description, this is working how it is supposed to.
I have a fix approved and merged in the current ServUO repo. I think I saw you at Brit Commons earlier lol. Anyways, see how this feels, I did some timed races, (one-one thousand, two-one thousand), and it seems right. I even took into account for overcapped creatures over 150 dex.