Yes, he sure is firing.

But actually, this might not really be a "bug." While you are correct in citing the rules for fire, look what the full rules say about observers.

The observer has his own weapons and fires independently from the pilot; as far as the game is concerned, the observer may be considered to occupy a different aircraft which happens to be in the same hex as the pilot’s aircraft.


So I could see how someone could read that very literally-- the "different airplane" that the observer is in would not catch fire and prevent him from shooting. Maybe.

Or if you want to try to get into the reality of it, a small engine fire (which is what this has to represent, since it often goes out and only does Blue damage) is something that would certainly occupy the pilot's attention...but a fire way in front of the pilot is not something the observer could help. I've read accounts of observers putting out small fires in the fuselage (caused by incendiaries) but I don't think those are in the game. All we have is the small engine fire, which may go out (chances say it will) and if not will usually take a long time to send a plane down.
So maybe it's "correct" that the observer gets to shoot. After all, you can get a better guess at where the target plane will travel (he'll skid or he won't get the benefit for putting out the fire-- a hard choice sometimes).