This is happening because when an object is damaged, the model changes and the mesh name referenced for the highlight doesn't exist anymore.
This looks like it was supposed to be a failsafe, in case a modder didn't set up their model correctly for the mesh highlighting. The user would still see something.

Reference: Sources\Sandbox.Game\Game\Screens\MyGuiScreenHudBase.cs:372 (DrawSelectedObjectHighlight)

Of course, should damaged objects even be interactable in the first place?
For example, you can damage the bed, and still mark it for respawn, it just shows text overlay instead of your banner.

Damaged objects should probably be interactable. For example, if a chest happens to get a bit damaged, it would be a little annoying to have to repair it to use. Perhaps a threshold of, say, 75% damage could be made, where above that they are interactable and below they are not? Not sure.