You mean an ungrounded three-prong outlet is not legal.
And then there’s Scenario 4, a power surge from a lightning strike or other source fries electronic devices plugged into an ungrounded outlet, whether two-prong, three-prong, GCFI, surge protector, UPS, or what have you. I’m more concerned about this scenario than any of the others.
An ungrounded, three-prong outlet is definitely not legal if it not GFCI-protected. If an ungrounded, three-prong outlet is GFCI-protected, then it is legal unless local codes say it’s illegal.
One of my gripes with GFCI is they can and will fail. I have discovered failed GFCI receptacles in my house, and they were not failsafe; they still worked, but offered no shock protection. 
It seems they fail soon after we get some lightning storms. (I have heard, though, that the design has been changed recently to make them failsafe.)
Definitely a code violation, and has two main safety problems.
The first problem is that the ground to follow the same path that the power does. You can’t just run ground wires willy nilly all over the place. You could have something damage the ground without damaging the power wires, which would result in a loss of ground without being noticed. It also makes things very difficult to troubleshoot.
The second problem is that you grounded to a water pipe.
Back in the old days, you were actually required to ground your house through the cold water pipe, since this was a nicely grounded hunk of metal that was present on all homes. You weren’t supposed to use your home’s plumbing as a safety ground though.
And then they invented plastic pipe, which meant that you could no longer rely on your cold water pipes to provide an earth ground connection. You still want all of your water pipes to be grounded because you don’t want an accidental short to turn all of your plumbing into a hot electrical connection, so your water pipes still have a connection to earth ground, but the purpose is backwards from what it was originally. Instead of using the pipes as a ground you now cannot rely on the pipes for your ground, and you only ground the pipes for safety.
Because of the double-fault you created, if someone replaces the pipe with PVC between your clamp-on connection and the service entrance (where it should be grounded), the entire copper plumbing on your clamp’s side of the PVC will be grounded only to whatever is plugged into that outlet. If something shorts, all of that plumbing becomes a hot wire, with no visible indication whatsoever of a dangerous fault.
For example, if someone replaces a section of pipe with PVC, then someone plugs in a computer into that outlet (because it’s the only 3 prong), then the entire plumbing section can float up to 120 volts and someone washing their hands can be killed by the resulting electric shock. And there is absolutely no visible indication that the fault exists.
I hope you put everything back the way it was when you were done renting.
A GFCI works by comparing the current in the hot with the current in the neutral. If they are different, then the GFCI assumes that there was some sort of ground fault and trips. The GFCI and the circuit that it is attached to do not need a ground connection in order to function. The GFCI is only looking at the hot and neutral.
This is why a GFCI with a label indicating that no ground is present is legal.
To expand on what @engineer_comp_geek said…
When you “ground” the third prong on a receptacle, first-and-foremost you must guarantee there is a good, low-resistance connection between that prong and the neutral/ground busbar in the main circuit panel. Simply connecting the third prong to a copper rod driven into the dirt won’t guarantee it. Simply connecting the third prong to a water pipe won’t guarantee it. The only way to guarantee it is to ensure there is nothing but copper wire between the third prong on the receptacle and the neutral/ground busbar in the main circuit panel. (Well, sort of… the copper wire doesn’t necessarily have to be continuous; there can be crimps and/or screw terminals in the chain. And I believe aluminum wire is sometimes used.)
Thanks for the detailed explanation. As I said, it was only intended to be a quick-and-dirty fix and served my purposes. I moved out when the owner indicated he was moving in himself and intended to completely gut the place from top to bottom and effectively build a new house on the existing foundation (which he did) so no worries there – my little grounding job is long gone, along with 99% of the original house!
The first problem is that the ground to follow the same path that the power does. You can’t just run ground wires willy nilly all over the place.
This is no longer true. With the adoption of the NEC 2014, it is perfectly legal to retrofit ground. Given an ungrounded receptacle that was legally installed at the time, it is permissible to ground it by running an independent ground wire back to pretty much any convenient, valid ground that’s large enough for the circuit. It need not be routed with the current-carrying conductors. Of course, a random water pipe is not considered a valid ground.
See NFPA 70 2014 250.130(C) “Nongrounding Receptacle Replacement or Branch Circuit Extensions”.
Evidently the NFPA decided that too many people were forgoing safety upgrades of ungrounded systems under the old rules, and decided to relax things to encourage more ground installations.
This of course does not apply to completely new work or remodels - those must follow the usual rule of all wires belonging to a circuit being in one cable or conduit.
This is very interesting and welcome news, @andrewm, and may prove very helpful. Thanks!
For new wiring, switches are required by code to be grounded, to guard against an internal short to the metal frame, or an external short with a hot wire in the box touching a metal frame. For a while there was an exception if there was a non-metallic cover plate with non-metallic screws used, but this was yanked because it found people were replacing them with metal screws and metal cover plates some time after the inspections were passed. Switches now even require a neutral wire to be run to the box location, in case someone wants to put an electronic smart switch or motion detector at that location.
Light fixtures are required to be grounded, except for a simple ceramic lamp holders, because there’s generally metal on the light fixture that a wire could short to.
Whether these are required to be upgraded in your house to current code along with the rewiring of your outlets, I don’t know.
Grounding to a metallic water pipe was actually permitted by code at one point where stringing in a proper ground was impractical, but is no longer permitted.
It could also be a liability issue for the electrician. Even if it’s not required by code for the light circuits to be grounded, they’re probably also fed from the ungrounded receptacle circuits you do want to replace. So if you leave those, then the electrician would have to splice the old wires into the new ones which could damage those old wires and lead to a short circuit or fire, and then it’s his problem. There’s a saying among contractors, “once you touch it, it becomes your responsibility.” So the electrician probably has a policy that either the entire circuit gets replaced or it’s not touched at all. No mixing and matching.