Fires can start in the following ways,

• An impact to a specific part on the vessel above the threshold that would be considered a crash.
  
• Projectile impacts from a weapon such as a deck gun or cannon

Fire will do the following,

• Prevent repair of the vessel or part on fire
  
• Damage/Ignite Nautikins
  
• Certain parts may be degraded or non-functional when on fire or smoking

Fires will not cause explosions over time, however if not repaired an explosion will occur once the damage of the vessel reaches critical.

Fires will not go out on their own and will burn forever unless one of the following occurs,

• The vessel sinks or is otherwise completely submerged in water
  
• The fire is put out with a fire extinguisher (find at buy shacks)
  
• The fire is put out with a fire monitor part by spraying water/foam

If a part is smoking but not on fire, it can still be repaired without extinguishing.
When properly extinguishing a fire you will see a progress bar

Rain does not affect fire. Nautikins wearing a environment suit will not be burned by fires.

In order to provide water to a fire monitor your vessel must be in the water or have a ballast tank (see submarine guide) filled with water. If you decide to build an aircraft with fire monitors it must include a ballast tank of sufficient size to hold enough water for the activity and still be able to fly. In order to fill the ballast tank you must land in the water. Filling a ballast tank will make it more difficult to take off because of the additional water mass.
You will need to switch to ship mode to fill / dump your ballast tank