In this case the user creates an entirely new Prefab with the same structure as the existing Prefab. The objects in the new Prefab have different IDs and the overrides can't be applied.
We try to keep as many overrides as possible by setting the IDs of the new objects in the new Prefab to the same values as in the existing Prefab using name matching, but this fails when there are duplicate names. We deliberately don't consider the order of the objects when doing name matching to be able to match reordered objects. The matching algorithm is not perfect, but considering the order will break when new objects are inserted in the hierarchy