Why did Grammarly suggest capitalizing the word 'dragon' in this sentence? It says it does not fit the context so needs to be capitalized:
Small birds chattered and scooted about in the undergrowth but vanished as the dragon approached.
Grammarly is simply wrong. "Dragon" here appears to be used as an ordinary noun. There is no reason to capitalize it. The only reason to capitalize "dragon" would be if it was a proper name or part of a proper name. Like if you were talking about the "Dragon and Unicorn Tavern". Well, or if it happened to be the first word of a sentence. Maybe some special cases.
Don't take grammar software too seriously. Take it as a HINT that you MAY have an error, not as a definitive statement. Once just for fun I took a grammar test that my daughter had been given in school, typed it into the computer, and ran a grammar check. Between missing actual errors and incorrectly labeling valid text as containing errors, it got a score of a little over 50% on the test.
You would only capitalize dragon in this instance if it meant something other than "generic name for fire-breathing reptile of fantasy."
For example, in Gregory Maguire's alternate history of Oz (the book series which starts with Wicked), animals which can't talk and aren't sentient are written in lowercase (dog, lion, tiger). However, those who can talk and are sentient, like the timid fellow Dorothy meets in the forest, are called Animals, and get capital letters: Lions, Tigers, Bears (oh my). Dr. Dillamond, who is a professor, is a Goat, not a goat.
In your story, if there's a difference between dragon and Dragon, you might capitalize it. Otherwise, Grammarly is just plain wrong, and you may cheerfully tell it to go stuff itself.
The above answers describe why it's a good idea to ignore the Grammarly software. And I agree with them completely. But they don't answer the question: Why did Grammarly suggest it be capitalized? Turns out "dragon" has multiple meanings, one of which is the proper noun "Dragon" (a.k.a.Draco), a faint constellation twisting around the north celestial pole and lying between Ursa Major and Cepheus.