yes it is flush mounted within the wall,however i found this article
Not in Vicinity of Easily Ignitable Material. Over current
devices shall not be located in the vicinity of easily ignitable
material, such as in clothes closets.Section 240.24(D) is aimed at reducing the potential of a fire
caused by molten material escaping from an assembly or enclosure
housing over current protective devices. Examples of
easily ignitable material include, but are not limited to, linen,
fabric, and paper products. NEC 240.24(D)
Flush mounting within a wall is permitted, so is surface mounting to the wall. The section you've posted is for the area outside of the wall that may contain easily ignitable materials such as clothes in a clothes closet.