I have absolutely no knowledge of how the Torque engine works, but wouldn't a player being submerged in water be treated as a flag? If so, then you should be able to make a zonebrick that disables the flag.
I don't know how Torque works.
Flags are for capturing. ;)
No, i suppose you could partially disable the water effect (not sure though).
However, the screen overlay would stay.
In any way, the best way to do this is to build it yourself with water bricks.
With the long awaited added feature of better water bricks (you can now place bricks in them!) some time ago it is less difficult. :D
