Hi Lon Ottosen
The 'update' setting is "what items in the group can its members update?" the options are 'only their items' or 'all items (group membership is limited to the organization).' If by chance you selected the second option, that option cannot be disabled once the group is created.
However, when you select this setting, the option to search for members outside of your organization is not available when inviting users to the group. You would not have been able to trigger that error with those settings turned on.
According to this geonet post from earlier, a user was running into this same issue and it turns out the other user outside of the organization was using a custom role. I would suggest confirming with the user to see what their specific privileges are!
- Jillian