There was an additional option set to Tools -> Current Project Properties -> Playback for "On object recognition". A new "stop on error" configuration has been added there to allow control whether or not to stop the project on object recognition. This should answer your question #2: How does this benefit the end user... in that it adds some additional control to "stop on error" configurations.
So, since that logic has changed, I imagine some conversions have been needed in other places. So, there's been some modifications between 12.6 and 14 with regards to the "stop on error" internal hierarchy and priority. I imagine that in the MDS file that contains those settings, if there wasn't an explicitly set value, it defaults to "Stop test item". That should answer, as best as I can tell, your first question: Why was this feature changed...new logic requires some conversions.
As for question 3. Manual, as far as I know, is the only SmartBear sanctioned way of doing it. However, the MDS file is a structured XML file that you could, if you knew where to find the settings, run a find/replace on the file to change the settings to the desired configuration.