It appears that the water in this hick town goes straight from the lake into your faucet. Purification? Filtration? Municipal water treatment? What's these newfangled whatchamacallits ya'll be footlin' about?
It's equally clear that the locals are well aware of the little flesh-eating virus that lives in their lake. WHY THE HELL DON'T THEY TELL ANY OTHER PEOPLE? Especially tourists!
It also appears that the bottled-water company takes this infected water straight from the lake into many plastic bottles for public consumption. Meeting public health and safety standards, in a horror movie? Pffft!
In a great many rural, wooded vacation spots, lake water is pumped directly into cabins and other camps. Oh, they sometimes test water to see if it's safe, but it's all part of the Fridge Horror of vacationing.
I imagine that in such cases, tourists would be warned not to drink the water straight from the tap without boiling it first. Especially in the United States where tap water is usually potable; that's just asking for a legal lawsuit.
Maybe the locals have built up an immunity (what with living near the flesh-eating virus) for so long. That would help explain Winston the Magical Karma-Escaper too.
Isn't it established that the disease has only just infected the lake? It was a bacteria the animals caught and Henry then caught it from their blood splashing onto him. He then ran off and fell into the reservoir, which is where the water in the cabins comes from. The disease originally seemed to be in the blood but when the blood was absorbed into the water, that became how the infection was passed on.
Which one of the protagonists actually catches the disease first? It seems to be a toss-up whether Paul or Marcy gets it before the other one, but who would they get it from?
Marcy had the disease first, and then gave it to Paul when she slept with him. Hence the sinister soundtrack whilst they were doing it, and Paul's pointless comment that they weren't using a condom, just so the audience is clear that the disease is being spread around here. Marcy was obviously the first infected because she starts showing symptoms much earlier - namely, the rashes on her back. As for how she caught this disease, the most likely answer is from a cup of tea she drank in the cabin. An earlier scene showed an ominous, lingering shot of a cup of tea she left on the table. Another possible answer is from a bath she said she was going to take after the romp.
Karen gets it from the glass of water Paul gives her the morning after Henry is killed. Burt gets it from drinking the water the next night ("Burt you just lost the bet"). Marcy getting it from a cup of tea would be a bit odd if the water was boiled - shouldn't the infection be gone then? She could have gotten the infection from inhaling the fumes from one of her many baths. She also mentions that she washed all the plates after Karen's infection was discovered. Pretty much anything she ate off the plates would have infected her. Paul either got it off Marcy when he had sex with her, or from when he washed his hands after feeling up Karen.
There are bacteria such as Hyperthermophiles that can survive boiling.
Is doubly confusing because Paul made a point of advising Jeff and Marcy to have "safe sex" when he accidentally walked in on them at the start of the movie. What, it's not okay for Jeff and Marcy to mix bodily fluids, but it's fine for him to leave Karen a souvenier?
Condoms are a bit of a mood killer. Paul and Marcy doing it was a bit of a spur-of-the-moment thing. If you're up, a lot of people don't want to put a condom on and risk 'going down'. If Paul had them, he probably didn't want to go all the way to his room to search for them so he was just asking if Marcy had them in the room.
Paul bravely tends to Karen, who is clearly infected, covered with bleeding wounds and puking blood without so much as a hint of concern for his own welfare. Mere minutes later, he takes the extremely painful step of washing his penis in listerine, because he'd just had bareback sex with seemingly-healthy Marcy. Considdering that Marcy was the least obvious threat to his health that morning, it seems like a huge overreaction. Although, to be fair, Marcy did infact infect him this way, so we might be able to chalk this one up to Paul being Genre Savvy.
He was paranoid about the infection. He'd just had unprotected sex, with a deadly virus floating around. He just didn't want to take any chances. Though why he thought pouring mouthwash on his penis would help...
He poured Listerine, which was originally sold as a surgical antiseptic, was used as a cure for gonorrhea, and has many cleaning/disinfecting qualities outside of mouthwash. You could do a lot worse to try to kill bacteria with.