The external hard drive is powering the RPI after you remove the microUSB power supply. This is called Backfeeding.
This is not unusual for raspberry pi's.
Is it bad for the pi
I would advise against backfeeding because there is little protection for the Pi. You would need to ensure there is a stable voltage and current to avoid damage.
I would not continue backfeeding unless there is a good reason to do so.
is it bad for the HDD
It would depend if the USB power supply on the external hard drive was capable of safley delivering 2.5A (raspberry pi recommended power supply rating). T
WTH is going on?
The result of backfeeding might seem odd at first but simply the power is running from the USB Hub within the external hard drive back to the raspberry pi.
It hasn't gotten uber hot, but could it still be a Fire hazard?
All electronics are a fire hazard. I wouldn't have thought the RPI would ignite becuase it had 5V supplied from an external hard drive. I have not had a safety issue with accidental backfeeding. I would say you are more likely to have a broken RPI or hard drive than a fire.
If there was a power surge within the external hard drive USB hub, you could damage the raspberry pi.
The Pi does not turn on when connecting the powered HD.
The raspberry pi requires initial power from the micro usb port. Someone has provided the steps to backfeed
If you wanted to reduce the risk of damage to the raspberry pi, you could cut off the 5V+ supply from the HDD to the RPI as described in this article.