How do you handle AOEs. Deactivate them in the tactics menu and taking over when one of them has to be fired?
Basically, yes. Even then, you have to be careful, as the damage reticule is often inaccurate, eg immolate has a bigger AoE than indicated, and chain lightning has no indication at all.
The way I worked it was to not give any of my companions AoE attacks. My mages were purely for support and CC, and damage either came from my inquisitor or a rogue companion.
As ottffsse says it's a poorly designed system, I'm not entirely sure why I play with it on. The way FF works basically excludes use of quite a few of the already limited abilities. Inquisition is designed around battles with relatively few enemies with large HP pools; the disparity between your party health and enemy health is huge, especially on NM and even more so with Trials. Additionally, IIRC the damage calculation uses a multiplier to further exaggerate friendly fire damage. The result is that an attack that barely tickled the enemy can one-shot your tank.
Edit: just to add, although most masterwork procs don't cause FF, I've occasionally been OHKO'd by walking bomb explosions from the masterwork on my reaver and rift mage. It mostly doesn't damage me, but on random occasions it will, no idea why.