Maybe 2) is more of a judgement call since a few bullet holes is probably preferential to the alternative.
At ranges that close... you really want a "deconstruct anything in the air" device, not a "consider what you're about to hit" device.
Which I'd imagine has been designer pushback on complicating it and going that route.
Safety through deciding what mode to set it in; not through leaving it alone and forgetting about it.
Seems a bit like Star Trek - “Their shields go down for a split second when they fire”. Maybe the system goes dark for a second to avoid shooting down outgoing items? Syncing the shields might make this better (or expose other weaknesses?)
Say it's a YJ-83 clone, so around mach 1.4 terminal velocity (476 m/s).
Phalanx tracks at 10km, engages at around 4km.
So it has ~8.4 seconds of engagement time to try to destroy the incoming missile.
... And that's a relatively slow modern target. A P-800 gets up to mach 2.4. BrahMos is mach 3?
I'd guess the Navy would generally rather keep CIWSs on a hair trigger, and just space their ships further apart in combat situations.
And afaik, most of the CIWSs have been removed in favor of RAM, since the gun-limited engagement ranges don't make much sense anymore.