What I find interesting is an extreme case ... (ie Sanity check).
We have 4 "targets" in the fight.
A is a 20th level elven archer .. he's 100 ft away ... (just to be sure he's "safe" and "not involved" re: melee).
B is a 1st level mercenary archer (hired by A) - also 100 ft away.
C is a Diminutive Toad (maybe a wizard's familiar who isn't present at the moment).
D is a Gargantuan Purple Worm
C and D are occupying the same space (thanks to the rule of more than 3 size categories different, they're just fine).
Because both A and B have precise shot .. they suffer no penalties to shoot at "D" ...
... and have zero change of hitting "C" accidentally.
Now let's assume the Purple Worm is grappling the Toad ...

(he hasn't swallowed it yet ... it doesn't have to make sense ... hehe)
Now that they are grappling, there is
a chance (whether it be 50:50 or something based on the difference in size) that the two archers will strike the toad by accident.
Does this really make any sense to anyone??
It doesn't to me. The size difference is just way too much ...
I can see the chance to hit a random target when they are both the same size ... however, once one target is significantly larger than the other, it becomes obvious (to me) that the larger target is quite simple to hit .. (and the smaller target quite difficult - in fact - likely more difficult to hit) ... however, the rules state the Toad is now easier to hit (ie Denied Dex ...)
I think the DM has to make some calls once the size differences start being "silly" (like in the above example). I think examples like this just reinforce the need of the DM to step in and say: "Hey, the rule was meant for 2 targets that are roughly the same size .. this situation is way out there ... I'm making a call ..."
.. Just my opinion ...