In our project we don't use database.yml, instead we have DATABASE_URL environment variable (managed by dotenv in development).
With this setup squasher uses db specified in DATABASE_URL (development db) instead of creating new 'squasher' database and then drops it after squash complete.
Luckily in my case nothing serious was lost and I've recreated development db from backup, but I believe this is major bug, as it can cause dropping of wrong database.
It would be good to at least stop if DATABASE_URL environment variable is present.