In SH4, the subs and ships have a basic 3d interior for the hull, the holes that appear are generated by textures just like in SH3, but rather than creating a black smudge it makes the area it 'invisible' its a clever little trick and at least allows for dynamic damage (whereby you will see holes where ever you have been shot) unfortunatly it doesnt work 100% of the time sometimes you get the hole - sometimes nothing.
If SH3 was imported over to the SH4 engine it would certainly be possible to acheive these effects, i doubt it can easily be done in SH3 as it is but it
might be possible.
It would be a very tediouse job to have to model and import hull interiors for all the uboats and ships in sh3, could perhaps make 3 or 4 then scale/adjust them to fit each ship or sub... still would be a lot of work.
The most convincing type of damage is true 3D damage (like the kind you see on crashed cars in many driving games)
This is not dynamic has to be predetermined and modelled in advance (much more work than SH4s solution), you need a damage model system in place that tells the game engine to alter or replace apart of a 3D object/mesh according to where the it was registered by the damage model.
With something liek this in place you could actually have things like a smashed up bow after a head on collision or deck plates missing after being shelled. Hell we could even have the Uboat break in half!
AFAIK ships damage in Sh3 must have something like this in place - for objects on the the deck that can be destroyed with the deck gun.
I expect this could be applied to the Player Uboats with great difficulty, but just imagine the amount of 3d work, hex editing and testing involved! it would be astronomical!
especially when you consider it has to be applied to multiple hull and conning tower types.... and it has to look convincing and
not look like a buggy mess!
Too complicated and time consuming, I guess thats what the Ubi devs thought too.