So today my teen sim, Alice, was chatting with the neighbors child and I noticed that the conversation bubble was saying she was talking to her niece!
I had no idea how this could be and even after viewing the child's family tree I was at a loss. For a while I couldn't quite figure it out. So I had Alice's sister talk to the kid too, and that did NOT show her talking to her niece, which I found even more odd. So I kept playing around and wondering until I finally realized; her boyfriend, Bobby is the brother of the child's dad. 
So yeah, the game was treating them as if they were in-laws and Alice and Bobby are only dating. I'm doubting there is anything I can do, but I felt it didn't hurt to ask. I then verified this by having Alice talk to the kid's dad and it also showed him to be her "brother-in-law". Also, I don't play with teens having kids or getting married and yes if they dated as teens I keep them together, but they can't woohoo or marry until the teen ages up. So I don't think it's anything to do with settings.
