Become a MacRumors Supporter for $50/year with no ads, ability to filter front page stories, and private forums.
It's very simple. The rating is FAR below what the watch is capable of. So, if you DO have water ingress, you far exceeded the IPX7 rating, thus your water damage isn't covered....

Sue goes to Genius Bar:

Sue: My :apple:Watch stopped working
Genius: It has water damage and is not covered
Sue: I only washed my hands a couple of times and splashed some water on my face like that picture hanging on the wall
Genius: Sue you are obviously violated the IPx7 rating
Sue: The what?
Genius: That means you are a lying to me about what happened

That would go over well.:D

ScreenShot2014-10-24at114540AM_zps52428622.jpg
 
Register on MacRumors! This sidebar will go away, and you'll see fewer ads.