[sirann]

First I had to clean up your code lol:

gridWidth = 9
gridHeight = 14
grid = {} 
 
for i=1, gridWidth, 1 do    
    grid[i] = {}
end
 
function tappedRect(event)
    if event.target.ship then   
        event.target.ship = true    
        event.target:setFillColor(255, 0, 0)    
    else
        event.target.ship = false
        event.target:setFillColor(0,255, 0) 
    end
end
 
squareWidth = 25    
squareHeight = 25   
gap = 5 
 
for i =1, gridWidth, 1 do   
    for j =1, gridHeight, 1 do
        grid[i][j] = display.newRect((gap* i) + (i*squareWidth) , (gap* j) + (j* squareHeight), squareWidth, squareHeight)
    end
end
 
for i =1, gridWidth, 1 do   
    for j =1, gridHeight, 1 do
        grid[i][j].ship = false 
        grid[i][j]:addEventListener("tap", tappedRect)  
    end
end
 
function addShip(shipSize)
    x = math.random(1, gridWidth)
    y = math.random(1, gridHeight)
    for i = 1, shipSize-1, 1 do
        if grid[x-1][y].ship then
            grid[x-i][y]:setFillColor(255,0,0)
        end
    end
end
 
addShip(2)

Then I saw

for i=1, gridWidth, 1 do    
    grid[i] = {}
end

which I'm pretty sure creates nested tables at keys of 1-9-1, which is a bit redundant. Should just be

for i = 1, gridWidth do

Then you try to perform an if check that will always be false as you never declared the event table:

if event.target.ship then   
        event.target.ship = true    
        event.target:setFillColor(255, 0, 0)    
    else
        event.target.ship = false
        event.target:setFillColor(0,255, 0) 
    end

More redundancy of for loops over writing table values

for i =1, gridWidth, 1 do   
    for j =1, gridHeight, 1 do

So, quite a bit of work (more than I posted) needs to be done to make this functional!