Yes, Make before Break, means that when the contact is moved to the next position (if it connects a battery--ie from 1 to 2 or 1 to ALL, OR ALL TO 1 ETC.) the circuit remains intact and there is always a battery present, thus the high voltage spikes will not damage the alternator diodes.
That is correct, you should never turn the switch to "Off" with the engine running.
You can check the continuity of the switch with no battery connected. Put the VOM on conductivity, and one of the leads on "1" and the other on "2", as you turn the switch between then the buzzer will sound momentary as you switch (and if you are on Ohms setting it will drop to less than one Ohm). This indicates that there is flow of current between the two terminals as you switch and it is briefly in "all" positon as you switch.
Starting and running on "All" is a good idea if you have fully charged batteries, and don't know about the switch. Just switch to the house bank (assuming this is "2") when you anchor or stop for any peroid--and save "1" for start, since there will be no power used and the starting battery will be fully charged. If you have a switch which will allow switching without damage, then you can start on 1, then switch to "all".
The beauty of the VSR is that they do this automatically--and let the starting battery charge before switching to "all"--