So, I've never actually SEEN this happen... but it APPEARS that the factions can settle areas under control of monsters. Judging by the nearness to monster layers I've found some of their cities, it seems they are breaking the rules. Which is REALLY annoying.
In addition, are the factions armies and settlers completely immune to being attacked? I watched them zip right by several roaming monsters who ignore them in favor of more tasty meat (ME!)
And also... they don't seem to react to each other... I would think enemies would attack one another, but they don't seem to. I watch a yeti patrol sitting right next to a dwarf patrol. We need to see some stink fur vs tiny handed dwarf action!