Issue the first: the DE Overwatch isn't bound to any weapon, so it always fails the ammo check and isn't applied.
This can be fixed by setting the DefaultSourceItemSlot on the ability's template.

Issue the second: in some cases, after the Overwatch fails for whatever reasons, enemies will decide to use the action point they've been given. for example, to shoot and kill some poor xcom soldier.
This can be fixed by changing the action point given/used.

I've got a fix mod out, but IMO it'd be better to just fix it in highlander.