Tested this with my account and Lava/Fall damage works perfectly fine for me as shown here:

 

@andrewkm As far as I know it's an issue with worldguard flags. I'm not sure exactly what causes it but any player flags don't usually tend to update if you leave the applicable town. Spawn has the invulnerable flag enabled and you can get quite far away from spawn before the flag finally updates (it may be on a timed check interval?) The same goes for a time lock in the town. It will instantly update if you /warp, /home, etc (any sort of major to) though, but just leaving the town border doesn't always work.
@a_man21 and I also noticed this sometimes happens with the PvP flag as well. @PixelGuy75 has a PvP arena at /warp pixeltown and occasionally it won't enable when you step into it. Having someone /tpahere you inside the arena will force the flag change though.