So, I recreated your policy and the label auto applies.  However, when I try and open an existing file in the SharePoint Online library in the browser, I get this message;


Screenshot 2020-06-27 at 18.42.40.png

And if I try and open in the Word app I get the following;


Screenshot 2020-06-27 at 18.42.52.png

Is this the same as what you are seeing?


Weirdly though, if I create a new file in the library, the policy matches and I can continue to access the document.

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