Highlight underline seems overridden by VSCODE highlight
The underline highlight seems to be overridden by the default highlight from VSCODE when the cursor is inside the tag name as shown in the picture

I am not able to reproduce this. Even though decorations are capable of being overridden by other decorations, in the case of HTML that highlight is being provided by the language's DocumentHighlightProvider which does not override decorations, though it does dim the underline. In either case, there's nothing this extension can do about that.
It could be that there's a bug when highlightFromContent is set. I will try that later.
Tested it, and it works fine. Could you give the custom settings that you're using (if any) and the code example with which it's not working?
HTML code naturally. The only personalisation i have is atom theme. Nothing else.
Same problem here. I work around it by turning off the "Editor: Occurrences Highlight" setting while leaving "Editor: Selection Highlight" enabled. This switches Code's behavior from highlighting matches under the cursor to highlighting matches on a selection.
I'm having this problem as well. Turning "Editor: Occurrences Highlight" off fixes the issue, but I would prefer to leave it on if possible. The problem doesn't occur when my cursor is over an element attribute instead of over the tag name
Hovering over tag name
Hovering over attributes
+1 On the problem that is mentioned above, can reproduce this bug. Turning "Editor: Occurrences Highlight" functions as a workaround, but it's really not handy to turn off all highlights of all occurrences of a name in other languages.
add this to settings.json
"editor.occurrencesHighlight": false
Seems I've forgotten about this issue being left open. At this point, the problem isn't present anymore so will close the issue.