It sounds like they could filter it if they wanted to. There are a couple key points to consider here. I don't know how important any of them are from a legal point of view but I can see how they would apply.

1. They're not responsible if things look different in Chrome than they do in other browsers. Whatever causes it, you agree not to have a cow. (think acid3 test, etc)
2. If you're using their software to do google searches then it's ok if you get a safe search and not an unfiltered one (although you should be able to change this, it's just a cookie based setting).
3. It seems to cover them having parental controls in the browser. People can turn such things on by accident and not know how to disable them (or legally try to claim that the method for disabling them is deliberately obfuscated).

Realistically I doubt they'd do anything stupid like active network filtering. That just isn't what people expect out of their browsers.

"Also, this sets an awful precedent in that the ISPs can point out that it's ok for them to block "objectionable" content where they get to define what's objectionable without any review."

That's a very silly statement. You have to remember two questions and their answers to work with any situation like this.

1. Whose network is it?
2. Whose money is paying for it in the end?

Failure to address the issue in terms of the answers to those questions is just engaging in poor man's politics which is otherwise known as grousing aimlessly about things you aren't willing to take a stand on.