It's not fun to have your ship destroyed where you don't feel like you had a chance of survival, but as long as it's part of the game and has an in-game justification that's just gameplay. I think what most people object to is where they are attacked for non-gameplay reasons, i.e. where there's no in-game benefit for the attacker. Then it becomes an attack on the player, not the CMDR, and personal attacks are hard to ignore.
The problem is that outside of powerplay there is no in-game justification for any kind of player interaction. There is nothing to do but shoot each other, and no particular reason to do that. The first missing element is a decent 'Pirating' mechanic, so it'll be interesting to see if planned improvements turn that into viable gameplay or not. The second is PtP trading, which I think we shouldn't hold our breath on.
Above all, PvP needs a bargaining element. At the moment the only thing an attacker can get a sort of perverse pleasure in the suffering of others. This means the best case scenario for an attacker coincides with the worst case scenario for the defender, which is a horrible state of affairs. What you need is to create a situation where a compromise is the best case scenario, which means giving the defender something to bargain with. The only bargaining tool they have is the possibility of future retribution on the attacker, so that's the part that needs to be sorted.
The key problem with the current system is that bounties are not punishments. They are rewards (albeit for someone else). The only potential drawback is that you may attract bounty hunters, and that is no drawback at all because NPCs are trivial to kill and CMDRs are both not interested in PvP for bounties and trivial to bypass anyway. None of that is ever going to change, and even that only last for a few minutes until you clear your bounties. In short, you cannot have a justice system that relies on bounties. As we are experiencing at the moment, this simply does not do the job.
One of the mistakes is treating ship destruction as death for the purposes of crime. It is clearly not a death, because we eject and are returned to a station in an escape pod automtically. We still have the same assets, the same name, the same reputation, so clearly everyone in the galaxy knows we are still the same CMDR. It makes no sense for all the various system authorities (who incidentally have no way of knowing that your ship was destroyed anyway) to suddenly wipe your record clean. Also, since the bounty money comes from nowhere and is never recouped, imagine the problem the galaxy must have with inflation.
More importantly, it ruins the gameplay of being a criminal. The whole point of being a criminal is that it forces you into the underworld. You swap one life for another. If you have a reputation for being unreliable in a particular area legitimate business there don't want to do deals with you any more. If you are a threat to society the authorities there will hunt you down and make you pay. If they catch you, you'll lose all your ill-gotten gains. The more crimes you commit the more you stand to lose. Until they catch you, you have to stay on your toes. That stuff is exciting! It is exciting because it means something, it actually has an effect.
At the moment, you commit as many criminal acts as you like, and then you can get rid of any problems in 5 minutes at virtually zero cost. Where's the fun in that? There isn't any. There's no incentive to be an in-game criminal, the only alternative to normal gameplay is to be a meta-game criminal (or griefer as they're known).
All you need to do to fix this is increase fines so they are at least equal to the damage caused, have criminal records remain until the criminal rights their previous wrongs (i.e. make fines persistent until paid) and have stations perform a security check on you with their faction before allowing access to services there. The first two are trivial changes because it's just about tweaking variables that already exist. The final one would actually take a little bit of effort to introduce, but would make the game experience a whole lot more interesting.
Please let people be outlaws FD!
