It applies because you have to look at rolling the dice as one event even though you're rolling twice. If you go into the attack saying to yourself "no matter what happens, I'll reroll the not hircrits" then you'll get the 1.25 expected damage, whereas if you start making judgment calls you'll lower your average long term closer to 1.
Obviously you make an exception for leathal damage because that's the only time getting more damage doesn't matter.
It's good logic when you start from scratch.
If you roll a black die, and are set to reroll unless you get a hit+crit, you're totally correct, the expected damage output is 1.25.
However, the expected output of the reroll itself is still only 1. The combined value across two rolls is higher simply because you won't reroll if you rolled a hit+crit to begin with - but in the OP's scenario, this didn't happen.
For a similar example, consider the expected sum of two six-sided dice: 7. But if you roll one of the dice first and it's a 1, then your expected value immediately drops to 4.5.