I'll spare you the details but the only mishap I've had with an iphone ended, rather amusingly, with it swimming in the bottom of a toilet. After fishing it out (yes, it was a clean bowl) I vainly attempted to dry it in the Italian sun outside the villa I was staying in at the time. As you might have guessed the iphone did not make a full recovery, it was bricked. When I got back to London I took it into my local apple store and mentioned that "I was having trouble getting it to charge...". Full credit to the apple guy, without so much as a wry smile he ignored the tide mark that cut across the middle of the screen and said he'd put it through as a battery replacement. £50 later and I was walking out the store with my new phone.
I've heard a few stories (usually on the Macbreak weekly podcast, never from anyone I know) of people going into the Apple store with a broken screen while under warranty having the phone replaced for free. It seems they have some license to do a good dead or two for customers, but there isn't an official policy. I guess with such a high margin product, they can be flexible sometimes.
