That does kinda look like a bug, but maybe a bug they decided to keep since it was a useful one. They clearly didn't bother to touch it up; but it's still very cool, even if accidental.
For me, one of the most impressive details a game can have is when NPCs have actual lives. As in, they actually move through the level and do things, other than just walking ten feet and resetting.
The Hitman series is probably the best at this, even though not all NPCs have lives.
Majora's Mask was also excellent in this regard.
If I remember correctly, Dark Cloud 2 also is pretty good at this; but it's been a very long time.
It was supposed to be a thing in Oblivion and Fable, but but they didn't really pan out, as far as I remember.
The Souls games also kinda-sorta do this, in that various NPCs will move around if you activate the proper triggers.
But there's one game that always impresses me, even though it's a terrible game.
Galleon was an Xbox/PS2/Gamecube-era game, and it was totally not fun, yet super impressive.
According to the relevant advertisements and magazine reviews of the time (Based on what I read, I'm thinking PC Gamer or EGM?), it featured pixel-pixel contact. It didn't have any hitboxes whatsoever. If that's true, it's nearly a one-of-a-kind game.
Of course, given the age and generic title, I'm having all kinds of trouble finding any relevant media of it at all.
But, based on how the game played, I tend to believe it. It had some of the weirdest gameplay of any action-adventure game I've ever played. As a whole, it's not a very good game.
But from a tech-standpoint, it was mind-blowing for its time (and, in some ways, still to this day); it even had all kinds of cloth physics and wall-running/climbing and stuff. It's a shame the game didn't turn out to be all it could have been.
Here's a trailer, and there's various gameplay on Youtube, but I can't find any discussions about the tech behind the game.