I believe it picks up the TrafficMaster signal as a carrier signal from ClassicFM, them gives you updates for your journey. Will only highlight if you have plotted a route and will show relevant problems as you approach or show you as higlighted when you select the traffic event list. If no route plotted will just show you everything on screen and in the list.
Ummm, bit of a tricky one. My work journey is from M25 jct 9 - 13 and back but as I work different shifts don't come accross traffic problems much except on Friday evening when on day shift. it popped up saying there was a problem so I didn't go on the 25, a friend of mine from work does the same journey and left work 5 mins after me. Lets just say that he was home before me :x
I think the moral was just to stay with the slow traffic, seemed to work OK though but I know what you mean, don't fully rely on it, I use 1200 (O2 network) as a back up.
I have only listened to the detour recommendations once, and to be fair it was as good I did, I learnt my lesson when I had TomTom5 with the Traffic add-on, it tends to panic some times and over react. Took me a week to realise I had it though.