This tag is used to describe a device that has been negatively affected by things that are wet. Usually very wet.
Water (or other wet, water based things) can cause electronics (such as Android devices) to create connections between points on circuit boards that should not happen. This is called a "short", and it makes very bad things happen. In extreme cases (such as full submersion) this can prevent the phone from functioning at all.
This type of damage (which is probably second most common to fall damage) is not covered under many phone warranties, and most devices have a sensor (moisture-sensitive sticker) that can tell a seller if there has been contact with things of a wet nature.