TLDR: Discourages players from joining large NPC battles(the ones you see so often in Nexerelin)
This penalty really doesn’t do anything for the game. What lore/logic benefits it might have is completely downplayed by how sheer counterintuitive it is when considering AI behavior. Say, you see 2 large fleets(invasion fleets perhaps) fighting, one from a faction you are friendly with. and you join the battle on the friendly faction’s side. The battle ends, you expect a boost to your rep to the friendly faction for helping them. But surprise! You get a -15 rep hit for “significant friendly fire incidents”. Ironically, the only way said incidents could have happened is that during the battle many allies clumped together and hence accidentally rammed each other. Great.
The requirements for such a penalty are remarkably vague. It appears that any damage on a ship inflicted by an allied ship in general is recorded as “friendly fire”. It does not differentiate if there was a dedicated sabotage attempt, if a stray shot hit an ally or if said ship literally just got rammed by an ally. It means, for one, that actions you never took(EG. Allies hurting each other) are still credited to you, forcing you to take the blame for something you never intended to do.
Regarding AI behavior, AI fleets during battles can occasionally become “idle”, in which they literally bundle around a single point in the tightest pack possible. They do this even when many enemies and/or stations are still present on the map, for reasons I do not know. The point is, this behavior causes numerous ramming incidents between allied ships trying to squeeze closer to each other, even causing overloads and/or deaths in ships with weaker flux capacitors or thinner armour. Keep in mind you didn’t do this.
And this is without mentioning that ships don’t seem particularly interested to avoid ramming incidents, as the player’s ships run on by they fail to move away and thus get rammed, even when they could have moved an inch to the right and get away scot free.
All this serves to breed an environment where the player is actively discouraged from helping NPCs in big fights, rather forcing the player to fight their enemies alone. Of course, in the long term an AI rework should be made to make sure the AI doesn’t breed environments rife for friendly ramming, but until then the much quicker solution would be simply to remove the rep penalty for friendly fire. Most (sane) players wouldn’t even think of firing on their allies anyway(right?).