That's how the switch is designed to work. In the up position, the switch is "closed", or in other words it is completing the starter motor circuit. Likewise, when the clutch lever is pulled in, that switch is also "closed" and completing the starter motor circuit. And both of those switches need to be closed in order to shift the transmission into gear from neutral.
As for the problem you were experiencing, it's certainly possible for some road crud (it likely wouldn't take much) to temporarily cause the side stand switch to malfunction with the side stand in the up position, and thereby not allow the engine to start with the transmission in gear.
The weird thing is that this happened first while I was at work and after I started it in neutral, with clutch in and kickstand up I then managed to get it in gear and ride home and didn't do any of that weirdness while shifting up and down after it was on.
Timeline of events:
1. Got off work, got onto the bike, in gear, kickstand up, clutch in and it didn't start.
2. Checked the on/off (fuel pump was making noise), lights are on and not a flat battery. Looked at a few other things and contemplated calling a tow.
3. Eventually tried to start the bike neutral, kickstand up and clutch in and it fired right up. Put kickstand up, put bike in gear and rode off home.
I'm going to write it off as crud in the kickstand safety switch assembly that got dislodged when I hit it with the APC, but it's odd that I was able to get it started in neutral with kickstand up and clutch in and it didn't die after I put it into gear and I was able to get home.