polyps shouldn't harm the coral much at all, but theres always a possibility lol. I have polyps and mushrooms next to each other and they touch all day long with no ill side effect. My guess is its stressed and it may be due to a lack of sufficient lighting, which does not sound too likely, or bad water.
The source of the water will tell you a lot. If your using tap water, then i would watch the nitrates closely. Nitrates not only create more algae for you to deal with, but actually can cause a fair amount of stress for more sensitive live stock the higher it gets.