I suggest you adjust your rule. A supplement like this doesn't necessarily modify the immediately previous word. Rather, we ordinarily expect it to modify the closest prior term which it is capable of modifying.
But adjectivals, like this clause headed the passive participle overlaid, don't modify prepositions (on) or verbs (lived)—they modify nominals. In this case, overlaid by different conventions modifies the noun phrase this model of reality.
(Actually, if you want to get really technical, it doesn't "modify" this model of reality. Modifiers provide given or presupposed information about the entity they modify, restricting its sense, and they lie within the constituent which that entity heads. Overlaid by different conventions, however, lies outside the noun phrase this model of reality and adds new information to what is already known about it: in fact, it lies entirely outside the main clause, as is signalled by the commas; it is not a modifier but a distinct predicate.)