Oooh. I wasn't too far off the mark with my thoughts it seems!
I think it's definitely a pragmatic way of handling it. If you actually are fluent in a language, at least to me, feels like it
would be silly for the game to force you to "switch languages" just to understand it.
Like in real life, people who are bilingual or multilingual (fluent) they do recognise it innately.
If it's just reading they understand, they probably wouldn't recognise if someone speaks it and visa versa. But if they know a little bit of either, they'd pick up on certain words in the way people actually do until their proficiency is higher.
Yet if they want to speak or write it them self, people still need to make a point/choice of which one they're saying or writing.
There are many ways of handling how many words are 'legible' to a person who's only learning or has limited knowledge of a language. Often it's words they hear the most often that they'll learn the meaning of initially, then expand out from there if they want more than just a 'basic' for haggling or travel purposes.
Some of the more common ones, people would likely 'pick up' easier than others due to simply hearing it more, obviously context dependant.
eg. Yes, no, buy, sell, help, come, go, shop, sleep, I, you