*** SOLVED ***
I solved the problem. Not sure why, but even though "Allow files in this folder to have contents indexed in addition to file properties" was checked, it appears this wasn't indexing. What I did was to select the directory that was not showing as being indexed, unchecked that box ("Advanced" under the "General" tab for folder properties). The clicked "OK", returned to the "General" tab and clicked "Apply". Pop-up box will show confirming attribute changes, select "Apply changes to folder, subfolders and files", "OK", then "Apply" and then let Windows update the attributes, then press OK to close the dialogue box.
I then went back in and check the box to "Allow files in this folder to have contents indexed in addition to file properties" and apply to the files, subfolders, etc. I was now able to add this to the Library without any notification / error, the "Add to Library" also pops-up as option when right click on the folder (this wasn't an option previously).