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Quite an interesting story. I can see why this wiring method would work, and I think it is an ingenious solution to a difficult problem. There is no more danger posed by this wiring setup than the standard setup… especially considering that there is no ground available. Whether it would be code acceptable is another issue... since there is no power going to the fixture when the switch is in the off position, and you don't have two different circuits serving the fixture (even if on the same leg of the service, this would be unacceptable), I think it just might pass inspection with an explanation.
I know all our readers will not understand this discussion, but it really is not necessary. Rather, it presents a valuable concept concerning electrical work that is worth repeating. Many homes have unusual and sometimes dangerous wiring, done by inexperienced folks and never inspected by a professional. When in doubt about your wiring, don't be cheap… hire a licensed pro to troubleshoot the problem! Sometimes there is no textbook answer, so it takes an experienced hand on-site to find the answer!! Unlike most home repair goofs, which may cause a bump, bruise, or hurt egos, electrical wiring errors can KILL!
First, a little background for our readers. Three-way switches are used when a fixture is controlled by more than one switch. A common example would be the switches at the top and bottom of a stairway (or at opposite sides of a room) that control the same overhead fixture. On the other hand, single-pole switches are used when a fixture has a single switch controlling it.
Normally, you wouldn't use a three-way switch for a single-pole application because (1) there are no "on-off" labels on the switch (admittedly a weak argument since the labels are virtually unreadable) and (2) they are a little more expensive. However, in a pinch you can use one IF you wire it correctly.
Three-way switches have four wire terminals. One is for the ground wire... usually indicated by a green "hex-head" screw. The "common" terminal is "differently colored"... usually copper-plated. The other two are what I fondly call the "uncommon" terminals.
To use a three-way switch in place of a single pole switch, connect the wires as follows: 1) Connect the ground wire to the ground terminal on the switch. 2) Connect either one of the two switch wires to the switch's common terminal. Connect the other switch wire to either of the remaining "uncommon" terminals. Whichever uncommon terminal you choose will determine which switch position is ON and which is OFF. Since vertically mounted wall switches usually are ON in the "up" position, stick to this convention so you don't confuse your visitors... or yourself.
If you were to inadvertently attach both switch wires to the uncommon terminals, heaven would not fall from the sky or fire rain on your head... the switch would just not work! But careless mistakes like this are why only the most conscientious people should do their own electrical work!
It is also interesting to note that some companies are now selling dimmer switches that go both ways... single-pole or three-way. More space on the hardware store's shelves for other goodies! Hallelujah!