When talking about ship flood simulation, are you talking about visually seeing the water splashing around and filling the inside of the ship and it's rooms etc?
Or are you talking about just simulating the ship physics so that it feels like if there was a hole in the front of the ship, that all the rooms would fill and the boat would essentially do a nose dive into the oceas?

As far as I know, in games like Silent Hunter 4, ships have a damage model, if the damage to a ship was at the front right side from a successful torpedo shot, then that would trigger the areas/rooms in that part of the ship which would effect the physics code for the ship, causing it to pull to the right and downwards. Each room would fill up slowly from linking. For example shooting a hole in the front, won't cause the whole bottom of the ship to fill up. It will start with say 2 rooms for example, and the rooms next to those rooms will fill up depending on a bunch of other factors such as the velocity of the torpedo when it hit, and the speed of the ship, and so on. It would eventually spread so that each room that is adjacent to the next, will fill up gradually depending on those factors, eventually causing the ship to sink and flood.
There are also other factors such as the crew on board the ship who can seal the doorways to stop the rooms flooding, so while it all may seem like one huge complex mess, a CPU will be able to compute this quite easily, especially with quad cores and the like, which can simulate several different things at once, rather than loading 1 or 2 cores with everything at once.

If you're talking about realistic waves being cut through, and having realistic individual ripples coming off the ship and so on, well..I believe it has been done in games, however not to the point where you are 100% convinced.
Some older FPS's started using water physics, such as UT2003 I think it was, but there were very unrealistic, but a nice touch none the less. FEAR has physics which are pretty damn good for water, however it still has that jelly feeling to it unfortunately.

I don't think that water physics is impossible, I have seen it in tech demos on game engines, however i'm yet to see those physics actually implemented into a game that uses them in shore waves or a tidal wave engulfing a city and so on, which causes the player to tumble about inside the wave with all the debree and so on.

End of blabber :P

I was inspired by Silent hunter 4 to post this thread. But I wanted to take that game the next step. By further and expanding it from only submarines to ships. I also wanted to be able to access and move around other compartments and have them flood when damaged. Remove the damage point system and have the ship sink on flooding alone. I would like to see water effect objects in the ship and forces of water able to push doors break down bulkheads ect depending on pressure. As far as I am concerned the game can keep the weather effects and ocean effects of SH4 id just like to see more realistic crew, ship interiors, and procedures. I want a crew to work to save a ship if its damaged and I want the player to have to account for current and tide. Its the next logical step in this genre and if cheating is necessary then that’s what needs to happen haha.

I don't think cheating is necessary at all with what you're talking about, it really just requires some more AI programming and animation on the developers behalf. And yes, I would LOVE to see a ship version of silent hunter 4. I thought that the expansion for it allowed for that, but I don't think I read correctly.
Since the player isn't really a character or avatar that moves around the ship, but more so just a camera, I think that pre animating the flooding of different rooms would be possible, albeit a hard task for the developers, it would definately be rewarding.

I look forward to seeing the advancements of Ship sim 2010 and SH5. I wonder what new things they will bring in.

There was a game for the original xbox called 'legend of the black kat' (http://games.teamxbox.com/xbox/181/Pirates-Legend-of-Black-Kat/) that had a very nice water physics model. I'm not sure how detailed the simulation was, but the effect (the most important part) was very convincing.