We have a window airconditioner above the outlet. Over the past few days I noticed our plaster walls are chipping. The outlet is grounded but Im worried about a fire. Thanks.

Go outside, look up under the bottom of the A/C, there are holes in the bottom of the A/C pan to drain out condensation. There may be a small plastic tube. These are probably stopped up and moisture is wetting the interior walls.

Water will cause physical damage as you have found out.

It WILL NOT short out a receptacle.