RV Extended Warranties

Article acquired from Warranty Week®

As sales plummet, the nameplates are dropping like flies. But the dealers have to make a living, and they've found that extended warranties -- sold at a discount or practically given away -- are a great way to induce skittish buyers to drop a quarter million dollars or more on an otherwise as-is purchase.

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.

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