top of my head response, since I am at work....
fighting underwater -- I would limit to stabbing weapons only (maybe claws if appropriate), but not bashing or other slashing weapons as the water would slow them down too much -- other than that, I like your solution (since it would vary if race is aquatically-oriented or not
Witchking20k, also found it to be very powerful and house ruled knock prone to be 2 boon points instead of one, and I am considering issuing errata for it
yes, you can fight defensively when prone, but I would limit it to maybe half AB