I think the issue here is a misunderstanding of that option.
The setting you circled is for a mouseover bar for non grouped windows. It does not disable Groupy, merely that bar that shows on ungrouped windows.
To disable groupy scroll down in that window and use the option to disable Groupy.
Looking at your grouped tabs, if those all auto grouped then that suggests you have told Groupy to do so either via automatic grouping for a single app (if those are all the same app), or by setting up a custom rule thats incorrect and causing multiple unexpected matches.