For the record. AppleCare does cover water damage for Apple watches. All Apple watches. S0-S2. I've had one replaced for water damage and having a second one replaced tomorrow. There are multiple threads here in the Apple Watch forum of those that have had their watches replaced for water damage. Search black spot & water damage. It is covered.
Not only do I have personal experience, if you read through the terms and conditions of AppleCare and AppleCare+ liquid damage or water damage is not excluded like it is with iPhone, therefore under law, it is covered. Apple would have to claim, like with the iPhone, that even though it is water resistance water damage is not covered under warranty. They do not do this. Therefore it is legally covered.
Edit: Here are threads:
https://forums.macrumors.com/threads/apple-watch-sport-screen-damage.1979136/
https://forums.macrumors.com/threads/black-spot-on-screen.1925245/
https://forums.macrumors.com/threads/black-spot.1912002/
https://forums.macrumors.com/threads/dead-spot-of-black-mass-appears-on-oled-watch-screen.1903214/
There are more, but this should be enough to prove the point.
Edit 2:
https://9to5mac.com/2015/04/24/apple-watch-damage-covered-warranty/
https://www.macrumors.com/2015/04/24/apple-watch-damage-warranty-service/
Notice that the word water/liquid is not even used in the guidelines for warranty.
Edit 3:
AppleCare Terms and Conditions:
http://www.apple.com/legal/sales-su...docs/archived/20151004/applecareplusnaen.html
The only use of the word liquid or water is in this sentence:
"ADH coverage only applies to an operational or mechanical failure caused by an accident from handling that is the result of an unexpected and unintentional external event
(e.g. drops and damage caused by liquid contact other than as a result of defect in material or workmanship) that arises from your normal daily usage of the Covered Device as intended for such Covered Device."
Because it mentions "caused by liquid contact other than as a result of a defect", for
only the use of an ADH replacement, any liquid damage caused by a defect, such as loose glue or a faulty seal, is covered legally. So if you cracked the screen, then showered with it, that is not covered.
Hopefully this is helpful for everyone.