Lithium-ion batteries (LIBs), due to their high energy density, long lifespan, and low self-discharge, are widely used in various applications. However, they are challenged by the risk of thermal runaway and thermal degradation, so they require effective thermal management system. In this study, we investigated the application of a water-inclusive housing structure to battery modules to prevent thermal runaway propagation and enhance thermal management. The thermal and electrochemical behaviors of the batteries were analyzed using the ANSYS Fluent simulator. Through simulations, we determined the optimal cell spacing of the water-housing module that maximizes energy density while ensuring thermal stability. Our results indicate that a water housing module composed of 20 cylindrical cells(10s2p) with a cell spacing of 4 mm can effectively prevent thermal runaway propagation and reduce cell temperature by approximately 60% during normal discharge, while maintaining 80% of the volumetric energy density of a conventional module. Furthermore, the reliability of our simulation results was validated through thermal runaway and normal discharge tests. The proposed water housing method holds great promise in preventing thermal runaway propagation and enhancing thermal stability of LIB modules, thereby mitigating the risk of fire and thermal degradation during normal discharge