Eliza Farrow is making ranged attacks against our players using the profile of the Duskblade.

The relic doesn't specify melee or ranged for the Overlord.

Is this allowed per the rules? Has a similar interaction occurred with any of your games before?

It may be strange since the artwork is a blade but talking only about rules, there's no trouble at all.

If you need an explanation, just imagine that the blade offers a magical power that lieutenant can uses and cast from afar.

The OL version of this relic doesn't function as a weapon. It just provides two abilities to the lieutenant:

1. A hero that starts his turn adjacent to this lieutenant receives -1 Speed for that turn.
2. Surge: Pierce 5

If the lieutenant attacks, he/she still uses the attack pool and attack type (Ranged/Melee) printed on the corresponding Lieutenant card. However, he/she can spend surges on the ability provided by Duskblade.