I feel like the exact scenario Crane described (decorative moss etc. on steel) probably had been discussed in the past as well, don't remember exactly how it landed. I could swear I remember making an argument myself that it is less intuitive for a bit of overlapping moss to imply the moss has eaten away the steel where it overlaps.
I think I may even have further explain it by saying that when terrain A overlaps with terrain B occluding parts of B, you can either say the terrain pixels of B were actually taken out and replaced by the terrain pixels of A. Or, you can think more 3-D and say the terrain pixels of B still exists alongside A's pixels in the same locations, they are simply visually covered up by the terrain pixels of A, literally as if you have one piece of paper on top of another. When it's normal-to-normal overlap, either interpretation makes no difference to the physics, because all terrain pixels get removed by terrain-removal skills anyway. But if it's normal overlapping steel, it's perfectly reasonable to take the second interpretation, in which case the steelness still remains despite the visual occlusion.
Anyway, a return to arbitrary steel areas is definitely not the way to go, but sounds like there may be a case for a mode where normal terrain can overlap with steel blocks without destroying the steelness.
I realize such a feature can be abused to the point where you basically can have steel blocks hidden completely behind terrain in a very misleading manner. Then again, hidden traps also exist and a level designer using misleadingly hidden steel is basically engaging in trolling the player just like using hidden traps. On the flip side, even without this feature, I can also see a different kind of abuse where terrain always eats away steel, but the evil level designer arranges things such that scattered individual pixels of steel remain while the rest become normal terrain via the occlusion, creating a nasty situation where technically the tiny "grains" of steel are "visible" but just barely (and bonus points if the surrounding terrain's color is similar enough to the steel grains' to further mislead the player).