Yes sensor should be replaced along with lower element.
1) Manufacturer's say that flooded water heater should be replaced: Call homeowner's insurance company.http://waterheatertimer.org/Flooded-water-heater.html
2) Brand of water heater is not known, but it could be the American or Craftmaster or Whirlpool energy-smart electric with control box.http://waterheatertimer.org/Whirlpool-Energy-Smart-electric.html
3) With energy-smart:
1 flash is start-up failure, and 3 flashes is sensor failure.
The moisture probably shorted element and/or lower sensor.
4) The moisture inside tank will take long time to dry out, especially since the foam insulation is wrapped tight. To dry out element and sensor, you have to remove cover and insulation over element, but if you leave insulation off and run water heater, then the sensor is exposed to cool outside air and will not read temperature inside tank.
Plus a wet water heater is electric shock hazard.
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