Is this supposed to happen...?

[Fincuan]

Looks like the torpedes are excessively efficient, and what you are seeing is the normal damage effect in SH4. When a torpedo hits, the textures in the "damaged" area turn transparent revealing the damage model behind them. Webster's mod makes the torpedoes a lot more destructive than the stock ones, and hence you get bigger damaged areas sometimes extending up to the superstructure.