Like many posters on here I’m happy to let passengers have a go if they wish, with the usual caveats of ‘not near the ground’ etc. Like BackPacker I do an annual charity flying day (Starlight at Popham) as well as other youth related sessions. I’ve even had the call “You might not remember me, but you’ve cost me a lot of money! Some time ago you took me for a ride in your aeroplane, I’m calling to tell you I’ve just got my PPL”.
With regard to the OP, if the PIC wasn’t an instructor, then it wasn’t an instructional flight. The PIC holds similar authority to the ship’s captain, described as ‘Master under God’. Ok, some captains I knew might dispute the authority gradient…. The point is that as PIC you can do what you like, and any results are your problem (should there be a problem). If as others have said, the passenger flying somehow caused the problem, then there may be a case against the PIC for allowing it to get that far. If it was a case of the loss adjuster dredging up any possible unrelated cause to disallow the claim, there are a lot of people who would really like to know the Insurance company and the loss adjuster, so that they can be avoided. I suspect most of us will now go and have a look at our aircraft insurance, to check that no such clause is hidden away in our policies. Thanks for the heads-up / warning.