You are right: when a new instance is created, PaletteLib setting is not filled in.
You need to indicate the appropriate PaletteLib.xml file, in order for the new instance to be usable for a WEST project.
However, the browse button - that appears as you click inside the PaletteLib field, is not working correctly (we'll take care of this issue in one of the future updates of WEST).
[b]Work-around[/b]: manually copy/paste the pathname of the relevant PaletteLib.xml file, relative to the BlockLib.xml file, e.g. Icons\WEST.WWTP.CN.PaletteLib.xml