Why is judging favorably vital? Because it means you are living among good people. As the Rambam – quoted a thousand times by Mashgichim – teaches, we all learn from our surroundings. (If you still don’t know it by heart, read it again here.) We can only choose which surroundings, as explained here (and also here!).
But it’s about perception, whether you judge the wicked as righteous or the righteous as wicked.
This is how Rabbi Yehoshua Leib Diskin (somewhere in his compiled homilies on the Torah) explained the juxtaposition of acquiring a good friend and judging Jews favorably (I’m not smart enough to think of this by myself):
יהושע בן פרחיה אומר, עשה לך רב, וקנה לך חבר, והוי דן את כל האדם לכף זכות.
No, this doesn’t alter the specifics set forth in Ahavas Chessed, of course, but it does serve as great motivation for judging favorably in cases you must, may or ought to anyhow.