What is the relation between water damage and a cracked iPhone screen?
Just like an automotive repair service, some damage costs more to repair than it would cost to make a new vehicle. In car terms, your phone is "totaled" and the physical damage to the screen alone lies outside the warranty.


You could buy a new phone from the vendor and then submit that cost to your insurance company if it covers the accidental (or not) damage to your property for reimbursement.
You could ask Apple why they aren't offering you a "partial repair" - where you acknowledge that some damage is present and want a limited repair and then forgo the warranty on the repaired phone. My guess is they decided that all Apple repaired phones need to pass all tests and they literally can't even know how much liquid damage has spread without entirely reworking the phone.
You could seek repair from a company or person other than Apple.


Liquid damage is expensive to even diagnose since the small cracks in an iPhone ensure that water can and will go everywhere. If corrosive salts are coating the electronics you now have a safety and reliability concern. The cost to inspect and test every single part is akin to painstakingly refurbishing a 1971 Hemi 'Cuda convertible that you found rusting in a field. In that case, there were external factors that made the cost to refurbish the product economically or socially pleasing.