If you are going to have them clip, please sort the models accordingly - like having the character go behind not clip through the guard - like what is done with weapon attacks - where it's either behind, infront or next to.
Also I think the implementation is a bit buggy, because it's doing it based on distance, rather than if there is available pathing space. You could also limit the clipping to half the selection circle size, rather than full clipping, or something like that.
I'll submit a bug report about it later after I've done a comprehensive test on the subject.