Water Heaters - Need chimney liner for gas water heater venting??

I have a 12 year old Kenmore natural gas water heater that I want to replace. It is currently vented into my chimney with 3 inch duct work. I also have a 10 year old natural gas furnace which is vented into the chimney right below the water heater.
I purchased a Whirlpool 40 gallon replacement from Lowes and purchased their installation services. When the installer came out he said I needed 4 inch duct work to vent and also needed a chimney liner to meet code. This would cost an additional $680!!! With this cost and some other "issues" with the gas lines that he would need to correct the total price for everything was close to $1600.00!!!! I sent him away and returned the water heater.
When is a chimney liner required? Is the need dependent only on local codes? Does the type (brand?) of water heater being installed determine the size of the duct work needed and whether or not a chimney liner is needed?

Codes vary all across the country, that said.......I am not familiar with any 40 gal water heater that requires 4" ducting. As a contractor that has served a stint with Lowes, I would suggest that you check local code requirements. They have to be licensed and insured, but not necessarily ethical. It used to be common to use one chimney for heater and water heater. Some areas now require each to be separate, but often existing construction is 'grandfathered'. Meaning it can continue. And as appliances become more efficient, smaller chimneys(vents) are now required. Many heaters don't even use the chimney. Only water heaters need a chimney, and that needs a smaller one, like 3".