Apple store says iPhone is water damaged, however LCI's are not triggered.

Sounds like its liquid damaged, and you know it, the sensors are not the only indication. This is a users helping users forum, if you wish to dispute the decision, it needs to be discussed with the store manager. Even if you phone Apple they will likely side with the people who have looked at the phone..

You're at the mercy of the genius and his manager. I can only relate my experience.

Wife's 6 was having intermittent charging problems; you had to wiggle the lighting connector to get it to work. Took it in and after examination, I was told there was corrosion in the port, indicating water exposure. But, he said, he couldn't "prove" water damage, which meant to me that the sensors hadn't been triggered. Unlike your experience though, they immediately exchanged it for a replacement unit under warranty. Maybe I was just lucky or maybe he had gotten lucky that morning 😉 and was in a good mood.

Is there another store or AASP you can go to, maybe with a different outcome? Although I'm sure there are notes for your device on file and that may tie their hands. Still, managers seem to have a lot of discretion in these matters. Be sure to ask about an "out of warranty replacement". It saves about half the cost of a new phone.