[patrickk]

iPhones and iPods have LCI (liquid contact indicators) built into them. It's a little white spot that turns red if exposed to moisture. Often, the LCI can be triggered for all sorts of reasons (not just dropping your phone in a puddle either, think a few drops of rain etc.)

http://support.apple.com/kb/HT3425 (applies to macs and keyboards but the same point remains)

People tend to get very hostile when there's some problem with their iPhone and get denied service due to the LCI being triggered, even if that isn't the root cause of the current problem. Hence the genius guy's surprise and over-generous response.

(Disclaimer: former Apple employee)