Her grandfather is a Duke, but she (and her mother before her) are only heirs presumptive and not apparent. Her mother was indeed a Lady, as the daughter of a Duke, but Elizabeth is only the daughter of a gentleman. If her grandfather had died before her mother and the latter would become a Dutchess in her own right, then Elizabeth as her daughter would be a Lady. However, in the current case, until her grandfather dies she is plain Elizabeth E. B. Talbot. It is possible that Grandpa marries a pretty young girl and gets a boy with her, thus removing Elizabeth from the position. I was surprised that they both used the title with her.
Other than nitpicking on details, I really love the story and the generous posting lengths!
