If you have a faulty 16GB Apple iPhone 4 you may be in for some luck. A recent report suggests that customers with a faulty 16GB version of the iPhone 4 are getting replacements with an Apple iPhone 4S of the same capacity due to a shortage of the older units.
It is unlikely that users can afford to upgrade their iPhones on yearly basis, specially given that you are locked to a two year contract. So in the case your iPhone 4 turns faulty you can consider yourselves lucky to receive a free upgrade to the latest iPhone at no charge.
It is important to note that exchanging your iPhone 4 with an iPhone 4S is solely based on lack of availability of the older model. There is also no official statement from Apple that a faulty unit should or will be replaced with a newer model. For now we can only assume that this will be the case based on the availability of the older hardware.
The iPhone 4 is currently only manufactured in an 8GB form, with users required to choose the iPhone 4S if they want a 16GB or larger variant. The iPhone 4S features a faster dual core processor, more memory and an improved 8 megapixel camera. That coupled with the Siri personal assistant makes the iPhone 4S an amazing upgrade if you are lucky enough to get one for free.
source - 9to5Mac