I narrowed down the problem, because at first I never had the problem, but as my site got old and I made new categories and rearranged others, the default setting for
These checked usergroups will have their photos stamped with your overlay photo.*
is by default "all checked" so they all get the overlay photo.
I'm not sure if that should be the default when no other existing categories are set this way.
Maybe not a bug but definately gets you pulling hair when all these watermark options are scattered all over the place and get created so stealthly.