Yeah, after I posted that picture here I had someone explain what exactly is happening... like you said, no good.
I didn't build or fill the system myself but there are a couple adjustments on the chiller and one of them seems to affect the "chill" this thing puts out. If I adjust it so there is no frost on the compressor my water temps rise from ~2c to ~9c(fully loaded system). Which I can live with if it means extending the life of the compressor.
Thanks for pointing out the danger to my system.