Smoking is a filthy habit and as we all know, it does not go well with diving. To that end, I do not smoke. It does not bother me in the slightest if other divers smoke, provided they do so considerately.
While it is not good for your health, it is unlikely to impact the health of the typical resort diving instructor, who tend to be otherwise healthy twenty-somethings, to the point that they are a risk to themselves or others.
I appreciate the image it portrays is not good, but that's the dive centre's business. If it puts you off diving with them, then that is your prerogative.
The only time I have looked at an instructor who smokes with utter horror is at my local quarry. There was a bloke who used to be there frequently with a sign-written van advertising instruction on the Megalodon CCR. I used to see him, in full kit, walking down the slipway into the water with a fag hanging out his mouth. He would get every last puff out of it before passing it to somebody on the surface and putting the loop in his mouth. As well as clearly being a heavy smoker, he wasn't exactly in his prime, and he was obese. I've not seen him for a long time; I suspect this may be because the HSE medical was tightened (UK diving instructors have to pass this if they are charging for their services). If you have a reasonably healthy BMI, it is fairly straightforward. As you enter the fat knacker category, you have to pass VO2 max tests - this bloke wouldn't have a cat in hell's chance.
There is a dive centre in Malta who a group of us dive with once a year; we get on very well with the staff and they know they do not have to worry about what they do in front of us. A few years ago, we were diving with them and were being asked where we wanted to dive the following day. We suggested Gozo, which is a smaller island off the mainland. The two instructors acting as our guides looked at each other, smiled, declared they could smoke, and high-fived each other. When we asked what this was about, they told us that the boss had decreed that staff were not allowed to smoke in view of the public while wearing their (very conspicuous) branded polo shirts. The following year we told they were not allowed to wear their shirts in a bar after 7 pm.
When we were there a month ago, we noticed the rules had been relaxed. My theory for this is they now have a second course director. I have known the boss (himself the other course director) wanted a second in order to brand themselves as a PADI Career Development Centre. As course directors are fewer and far between, I'm guessing he was faced with the choice between letting her smoke, or not being a PADI CDC...