Yeah, a hit before the timer went off would result in zero damage and the destruction of the torp. Basically the thing only does damage if you correctly set the timer for the range you want to use it at. This would make it super difficult to use. Which I think is a good thing.
There would also still have to be a minimum timer. Something like 5 seconds, or even 10, just to ensure the gun is useless (or at least very low power) at short range. Or just have the thing do massive friendly-fire damage if the gunner sets the timer too low.
Zill, I would say this has different roles at different ranges: Area denial long range, high damage/difficult to aim or time medium range, and useless short range. I think it would mostly mix up the long range game by forcing snipers into the open. Ships with this would be pretty weak against brawlers, sure. You need a good ally. Or an amazing gunner to hit them as they approach.
I'm not talking an overhaul of arming time system. The set-timer mechanic would only be for this gun (and maybe subsequent guns it makes sense for, but none I can think of). I'd be exicted to test this sort of thing, and maybe it'd never be viable (it could be too OP or too weak to make sense) but I think it deserves a shot.