I bought the cheapest DC pump TSC sells and added that exact filter at the outlet of the pump with it in an upright position as shown in your picture. It never happens as I am careful with the quality of my diesel, but If I were to have sucked up water from the tank it could be seen at the bottom of the filter and drained out with the pet cock.
On the water absorbing filter, read the directions in the box which state that is an absorbent filtration system, not a molecular blocking system, and the filter has to be changed periodically when it gets full of water......nothing tells you this...you just have to change it on a regular basis or when you think it might be full. Running three hundred gallons or so per year of clean diesel, in sealed tanks, and never seeing water in the filter, nor in the bottom of my storage tanks at fill up time, I don't get very excited that it's time to change the filter. I use セ" hoses so I just neck down the 1" fittings on the pump and filter.