Scenario: I am placing my ships out into the unknown and at the end of my "road" I decide to build a settlement. When the new hex is flipped it is a water tile and now a settlement cannot be built. Must I replace it with a boat and play the appropriate cards instead?
You should reveal the hex tile when you first build a ship that reaches it; you don't wait until you are building a settlement.
From the rules:
When a ship (or a road) is connected to an unexplored area, a new tile will be discovered! If you place a ship or road that connects to the intersection of an unexplored hex, you must immediately draw the top tile from the pile and place it face up in the empty space.