Does HD necessarily mean clear, high quality images?
HD simply refers to a given number of pixels in the signal, not some measure of quality.  Even 1080p TV is lower resolution than the photos on most camera phones.  Even the 4k video used in the latest Hollywood blockbuster movies is lower quality than the still photos of most camera phones.  Video takes up far FAR more data than stills.  If you think about it, 1 second of video contains between 24 and 60 individual photos depending on the format of video being used.  Now there are ways to shrink the video since a lot of the pictures are very similar, but the quality that can be recorded is still much smaller than what we can process for a still.

The think is that an 8mp camera phone still doesn't shoot any better than 1080p video at most, so while it may take 8mp stills, it only takes sub 2mega pixel video.  720p isn't all that much better than an old 480 display.  The main advantage is the progressive scan, but there still isn't that much more information (about double).

The other thing to note with security cameras is that they tend to be made to be durable more than high quality.  The optics are probably not that great and they favor infinity focus over sharpness.  They want everything in the scene to be reasonably in-focus instead of having any particular area really sharp.  So between the optics, the design goals and the limited resolution, it isn't all that surprising that it doesn't render things that clearly since it isn't the goal of a typical security camera.

The term is not at all misleading though and based on your description, it sounds like it behaves like I would expect for the device.  It is High Definition since 720p is a high definition standard even if the optics don't give you as sharp of an image as you'd prefer.