Imagine buying a defunct manufacturer's vehicle from a failing dealer in a contracting industry. And then imagine being surprised when nobody will fix it for free under warranty, despite promises made at the time of sale. It's like the old saying before state and federal regulators became more deeply involved in warranties: If you're driving home from the dealer and the car breaks in half, you own both halves.

Now imagine submitting a warranty claim using the forms of the Internal Revenue Service and the efficiency of the U.S. Postal Service, with parts delivered by Amtrak and payments handled by Medicaid. We all love our elected officials and always include their names in our prayers at night, but does anyone think the government is going to process warranty claims better than private industry?

They say nobody would buy a vehicle without a warranty, yet the product warranties typically issued for most used vehicles are very short and very limited, if they exist at all (most private sellers issue none). Meanwhile, with recreational vehicles, an entire industry has already seen the collapse and disappearance of multiple manufacturers who took their warranties with them to the bottom. So the nightmare scenario for passenger car makers is recent history for the RV manufacturers.

The sad news is that half a dozen leading motor home manufacturers and suppliers, including major nameplates such as Fleetwood Enterprises Inc. and Monaco Coach Corp., have been forced into bankruptcy over the past year. That leaves survivors such as Winnebago Industries Inc. and Thor Industries Inc. as money-losing operations running well below their break-even levels.

Sales at Winnebago are down 73% and claims rates have more than doubled in the past year as the company continues to fix last year's sales with this year's diminished revenue. At Thor Industries, sales are down 62% and the claims rate rose to 5% of sales for the first time ever in the first calendar quarter of 2009.

According to a May 14 article carried on the Reuters News Wire, RV manufacturers expect to ship just 14,100 motor homes this year -- the industry's worst showing in the 38 years that data has been collected. That is not even half the 28,300 motor homes the industry shipped last year and is down 80% from the 71,800 vehicles the industry shipped five years ago, the Reuters analysis calculates.

The Chicken or the Egg?

It's hard to say whether the downturn in sales of recreational vehicles caused the collapse of several manufacturers or whether the collapse of several manufacturers scared away buyers. It's probable that both were outcomes of the more general recession, although the peak of RV sales happened long before the collapse of Lehman Brothers set off the panic. Long before September 15, credit sources were drying up, making it harder for customers to finance a purchase and for dealers to finance inventory for their showrooms.

Suffice it to say that for whatever reasons, RV sales plummeted and some manufacturers didn't survive. However, some did, and they will emerge with their companies intact and with their warranties still valid. But for those that didn't make it, there's still some unsold inventory that dealers will have to sell as-is, without factory warranties. So who would buy the nameplate of a company that has disappeared or is likely to do so soon?

It's more than an academic question, because one of the lingering impacts of the current recession is going to be the impression that no manufacturer can ever again be called 100% safe -- not even hundred-year-old makers of passenger cars that used to dominate the Dow Jones Industrial Average. And in a way, what happened to the homebuilders and the RV makers in 2007 and 2008 might serve as a cautionary tale of what hopefully won't happen to General Motors and Chrysler in 2009 and 2010.

The question is, would anyone buy a brand new $300,000 motor home from a dealer without a warranty? And if the answer is no, can an extended warranty fill the gap and make the product appealing, or does the price have to be discounted to used vehicle levels before someone would even think of taking such a risk?

The answer to the first question is no. Nobody would pay list price for what amounts to an as-is unit. They'd insist on an as-is price. And a significant price cut can be very persuasive. As is well-known to anyone who shops at liquidation sales and buys gently-used floor models or demo units, generous discounts are to be expected if the buyer is to assume all the risks of defects. That goes for computers, televisions, and yes, even $300,000 RVs.

Buying New Without Warranties?

For the risk-averse buyer, however, what can be done? If they wanted an as-is unit, they could buy a used one off Craig's List. But the risk-averse buyer doesn't want to "buy somebody else's problems," so they shop new. So in the absence of a manufacturer's warranty, could they be persuaded by a vehicle service contract thrown in as a deal sweetener? Or will they always walk by the Monacos and the Fleetwoods, and head straight for the Winnebagos and the Thor nameplates, in the belief that they're less risky brand names?

Doug Williams, general manager of Adventure RV & Truck Center in Wichita, Kansas, said the effect of the demise of any RV manufacturer is somewhat limited because usually the engine and the transmission are warranted separately by companies such as Cummins and Allison. About all that a company such as Monaco Coach used to warrant was the RV's structure, and Williams said he's never seen a structural problem with a Monaco unit. In other words, it's not so risky.

Still, some customers are a little skittish, so Williams said that for the sake of their peace of mind, he sells them an extended warranty for a dollar and then he pays the full premium out of his own pocket. "Honestly, I don't like the expense," he told Warranty Week, "but when you have a company that's out of business, or have sold their assets, there isn't much else you can do to reassure the folks, other than offer that extended service plan."

After filing for bankruptcy, Monaco Coach sold most of its assets to Navistar International Corp., which has now renamed the business unit Monaco RV LLC. From now on, motor homes made by the Navistar business unit are going to be fully warranted by Navistar. But owners of the pre-bankruptcy and pre-acquisition units are on their own. The old Monaco Coach entity has been renamed MNC Inc., and it's not paying warranty claims any more while it winds down its operations.

If there are still any unsold Monaco, Beaver, McKenzie, or Safari units out there on dealer lots, they're going to have to be sold without product warranties, or more precisely, without warranties on the structures. Stephen Burgess, president of the ACC Warranty Services Group, a brokerage firm that specializes in RVs and trailers and which works with seven different insurance carriers, sees that as less of a problem and more as an opportunity. Where a manufacturer has failed to protect its customers, an insurance company can step in and succeed.

Generous Price Discounts

Burgess said the lack of warranties on some vehicles has been largely "fixed" by a combination of generous price cuts and extended warranties. "You can buy a coach that was maybe $300,000, you can buy it for $200,000 as-is, even though it's a brand new 2009 model, buy a five-year warranty for $5,000, and the customer feels like they're getting a tremendous value," he said. "So all of the burden is now on aftermarket warranties from day one of customer ownership."

Burgess noted that in the past, most RV extended warranties usually began coverage the moment the manufacturer's warranty expired, rather than at the moment of sale. So when some manufacturers went bankrupt and stopped paying claims, some unlucky RV owners were left with a gap in coverage, waiting for the date their product warranties expired.

In something of a legal technicality, the warranty had not yet expired, even though claims were no longer being paid. In other words, the warranty was still in force, but it was worthless. Nobody had officially cancelled the warranty. They just stopped paying claims.

Now that's all changed, thanks to changes put in place by the insurance carriers. "In the past 60 days," Burgess said, "virtually all of the carriers have added a clause -- and they charge anywhere from an extra $200 to $500 -- to provide that first-year or first-two-year coverage, now that the OEM warranty is black."

On new policies, the first-year coverage can be built into the price, allowing it to take the place of the factory warranty when the factory's been shut down. But it can't always take the place of the product warranty, Burgess said, because in some states it would be illegal to simply give away a service contract, as is done with a product warranty. In those states, it must be separately itemized, separately priced and separately sold.

"It's a very fragmented set of laws," Burgess said. "Some states just will not allow you to write $0 for the selling price of the service contract and build it into the top line of the vehicle sale." Yet they might allow the dealer to sell a $5,000 warranty separately and then knock $5,000 off the selling price of the RV. Or, as Adventure RV & Truck Center does in Kansas, they can sell the service contract for a dollar and pay the true cost out of pocket. "It all comes out the same. There are just some compliance and regulatory issues. Each dealer -- they're aware of what their state requires," Burgess said.

Who's Next Into Chapter 11?

The thing is, it's not just the nameplates that are already bankrupt that need the extra protection. What's amazing is that any manufacturers could stay out of bankruptcy after sales plummet. And who really wants to be the last one to buy a sleek new RV before the manufacturer files for Chapter 11 protection?

As a result of that fear, Burgess said, "You will see many dealers now including one-, three- or even five-year service contracts with the purchase of any new RV." And that coverage, he said, is becoming integral to the package. Otherwise, the kind of people who can live with risk, who can live without warranties, and who can finance repairs out-of-pocket as they go, would be looking at lightly used vehicles, where prices are even lower.

Then again, there is always a price at which a new unit can be sold as-is, without a warranty. Unfortunately, that level is probably below dealer cost, and might also be below manufacturing cost, which is why it has become cheaper to simply close down the factories and wait for conditions to improve.

Then there are the fears that the backers of the extended warranties might go under. Burgess noted that most of the service contracts sold by RV dealers today are fully backed by an admitted A-rated insurance carrier, and not by a risk retention group. In recent years, especially in the passenger car sector, some of the most spectacular service contract industry flame-outs have been those that were backed by poorly-financed RRGs, some of which turned out to be based in offshore tax havens beyond the reach of U.S. attorneys general.

Burgess also noted that very few dealers would try to either sell or give away do-it-yourself service contracts that are valid only at their own repair shops, for a very simple and non-financial reason. "With an automobile," Burgess said, "that might be fine, because the customer is going to use it to go to work and then go home. So they're going to be in that dealer's general vicinity. The nature of an RV, however, says that if you're going to have a problem, you're probably going to be traveling, and it's not going to be possible or practical to bring it back to the selling dealer."

But even if the RV owner intends to drive their vehicle in circles close to home, there's a regulatory reason why private, self-administered service contracts sold by dealers would not work. "There are only a few states where that's even allowed," Burgess said. If underwriting by an admitted A-rated insurance carrier is best and by an RRG is second best, no underwriting at all is at the very bottom of the barrel.

Meanwhile, an aftermarket extended warranty with solid insurance backing could one day be seen by frequent travelers to be superior to a factory warranty, Burgess suggested. "With a factory warranty, even if they have 300 dealers across America, it might not always be practical to get to one," he said. "Aftermarket will allow you to go to any service center in America -- which probably numbers 50,000 locations -- for repairs. Aftermarket is much more flexible."

Not-So-Simple Substitution?

Paul Wojcicki, an attorney and shareholder with Segal McCambridge Singer & Mahoney Ltd., said it's not so simple for an extended warranty to take the place of a factory warranty, especially if the vehicle is a motor home rather than a passenger car.

"The warranty coverage provided on an RV is very different that what we see in the context of an automobile," Wojcicki said. "With an automobile, generally you're getting one, maybe two warranties. You're getting one from the OEM, and then you're getting a separate tire warranty."

In the case of an RV, there are frequently multiple warranties issued directly to the consumer by multiple manufacturers and assemblers of the various components. It's more like what happens with trucks, where the engine is usually warranted separately from the chassis, which in turn is warranted separately from the interior of the cab.

"In the RV field, any given unit is probably subject to 10 or 15, maybe even 20 different warranties," Wojcicki said. "Tires, appliances, transmission -- you name it. All these different components have their own warranties. And in many cases, the supplier warranties exceed the term and duration of the OEM warranty."

What that means, Wojcicki noted, is that RV buyers are not typically left as high and dry as would be a passenger car buyer who relied on an OEM that went out of business. "They still have all these alternative sources to obtain diagnosis and repair of troubled components," he said. "Unlike an automobile consumer, an RV owner really has a significantly greater level of protection available, even after or in the face of the demise of the nameplate."

Of course, there would be lots of finger-pointing if the component supplier were to believe that the trouble comes not from their unit, but in the allegedly incorrect way their unit was installed. In normal times, such a dispute could be settled by the assembler, dealer, and the supplier, but in these cases we're talking about an assembler that is no longer in business, and a dealer that knows they might not get paid for their warranty work.

Reorganization vs. Liquidation

In fact, it bears noting that with RVs we're usually not talking about a mere bankruptcy. That creates its own problems, primarily in terms of the speed at which suppliers, creditors and the dealers who submit warranty claims will be paid by the court during the reorganization. What we're talking about here is the next level, where the bankruptcy turns into a liquidation and there is no money to pay anyone anything after the shutdown, or perhaps into an acquisition of assets where the acquiring company disavows the debts and claims of the defunct company.

Although, here we are six weeks away from the morning that Chrysler filed for bankruptcy protection and already they have emerged. So it's not always a slow process, and it doesn't always inevitably end in tragedy. Even in the case of Monaco, the brand names live on even if the warranties didn't.

As a point of law, Wojcicki noted that the warranty obligation doesn't actually expire with a bankruptcy. "The warranty obligation remains," he said. "The problem is that it no longer becomes enforceable." The dealer can't get an authorization from the manufacturer to do the work, and it probably won't get paid anyhow, so it will probably turn down the job (or ask the customer to pay out of pocket).

"Technically, the warranty hasn't gone away," he said. "But it's become unenforceable on a practical level, and it's become unenforceable on a legal level." When a company files for bankruptcy, the court typically issues a stay that prohibits others from pursuing any other legal actions in any other venue. "You can't sue for breach of warranty any more."

So if the warranty is not legally void, but it won't pay claims, Wojcicki said it becomes a debatable question as to whether the product is still covered under warranty. And that gets even more complicated if the service contract that's supposed to fill the gap uses certain wording that overtly excludes coverage during the factory warranty period.

Reading the Fine Print

For instance, Wojcicki said he looked at one vehicle service contract that stated in one section that it becomes effective on the day of purchase. That's all well and good. But in another section, the contract states that it doesn't cover mechanical breakdowns normally covered by either the manufacturer's warranty or by recalls, "regardless of whether or not the manufacturer is doing business as an ongoing enterprise."

In other words, if the warranty is in that legal limbo, where it isn't quite void but it won't pay claims, that doesn't automatically mean the extended warranty will kick in. If it were Wojcicki's client that couldn't get his claim paid, he said he'd open a debate about the meaning of the word 'covered.' "Does 'covered' mean theoretically covered? Legally obligated? Or actually paid on? I think there's something to argue about here," he said.

Can we do without warranties? Can a product be sold without any express warranty at all? That's not possible in Europe, because of EU directives that require two-year guarantees on most consumer products. But in the U.S., current law doesn't actually require warranties (outside of some environmental warranties and other exceptions). Instead, the law merely specifies what the warranties must include and how they must be disclosed if they're issued. And besides the implied warranties of merchantability and of a product's fitness for a particular purpose, many used products are traditionally sold with no warranty at all. With used vehicles, for instance, only dealers need to issue a product warranty, and only in some states and usually for very short durations.

So why can't new products be sold without warranties? Some vehicles left on the lots of expelled Chrysler dealers, in fact, will have to be sold without new car warranties, because they will essentially be sold by unauthorized dealers who will not be reimbursed for their warranty work. One can quibble over whether anyone would buy a vehicle made by a bankrupt manufacturer, but who would buy one as-is from an exiled dealer?

"You're talking about risk," Wojcicki said. And the consumer has been conditioned to believe that product warranties and/or extended warranties reduce or eliminate risk. They might believe that just because their new unit has a warranty, somebody will always fix it for free, at least until the warranty expires on time or on mileage. And they don't know the law, and they don't read the fine print. They don't typically ask the salesman about the A.M. Best financial strength rating of the insurance company at the time of purchase.

RV Buyers More Sophisticated?

Then again, in the course of his legal work on behalf of manufacturers, Wojcicki said he has deposed hundreds of RV buyers, and they do seem to be a bit more attuned to the risk that things will go wrong, even with a well-made product. "Most motor home owners realize that when you build a home on a truck chassis and drive it around the country at 70 miles per hour, basically being subjected to hurricane-like forces, they expect that things are going to need fixing and repair and a higher degree of maintenance," he said.

Basically, because the product requires so much more involvement by the owner, he said he thinks those owners tend to be better able to balance the risks that come with the purchase of a new versus used, warranted or as-is vehicle. Then again, we'd retort, there's always the urban legend about the new RV driver who's so clueless that they think that the cruise control will steer the vehicle while they go in the back to make themselves a cup of coffee.

As steady readers of Warranty Week know in detail, the cost of a warranty is theoretically built into the price of the product at the time of sale. Manufacturers typically estimate the future net warranty cost of a given unit and accrue that amount in a warranty reserve, to be spent at a later date. If those estimates change, because quality improves or the warranties get longer or shorter, they modify their accruals accordingly. And if the company is no longer paying claims or if the products never fail, those accruals can be released and turned into earnings.

That's the theory. The problem Wojcicki said he sees is that none of the bankrupt manufacturers are going to reduce their wholesale unit prices to compensate for the fact that they're no longer paying claims, and none of the dealers will be compensated if they cut their prices to sell their inventory as-is. Selling extended warranties at a reduced price to compensate for the gap is a great idea, but dealers shouldn't expect the bankrupt manufacturers to chip in.

Be Careful What You Promise

Wojcicki also cautioned that the dealer has to be very careful about the representations they might be making if they tell the buyer that a vehicle service contract will pay for everything that the manufacturer's warranty would normally cover. Are they absolutely sure there's no gap in duration, and no exclusions in coverage? Because if there are, the dealer might unwittingly be verbally promising to cover the difference himself, out of his own pocket. Legally, it might be better for the dealer to cut the vehicle price to compensate the customer for taking the risk, he said.

If things work out for Chrysler and Fiat, and if General Motors races through its own reorganization in six weeks, none of this may matter much. Rather than being at the vanguard of a widespread vehicle warranty crisis, RV dealers might turn out to be an isolated case.

Perhaps the U.S. government will become the Medicaid of the warranty world and nobody will ever again go uncovered? Or perhaps sales will recover so fast that business as usual returns soon? But just in case people find used cars to be a better value with lower risk, or just in case new car buyers don't flock back to the Government Motors chaebol, passenger car dealers might do themselves a service to study how the RV dealers are using fully-insured extended warranties to keep themselves in business.