Smitty, I don't think it matters whether the tractor has been underwater or not. The tractor is out of warranty and the clutch is a mess. Whatever you and MF do for this guy is good will on your part. We have no way of seeing the number of low-hour split tractors that you and MF do, so we have no way to make comparisons or say if this is due to submersion or condensation.
I do know one thing, if I owned a MF of this or another model, I'd be drilling a drain hole in the bottom of my bell housing and putting in cotter key dongle, maybe even two holes. To me, that bell housing looks too tight. When the clutch and engine operate, the air inside is going to get warm. If the weather is cool outside, warm moist air will condense inside the bell housing and could easily drip down onto the clutch surface. Sure, this is extreme, but if the owner regularly uses his tractor for short runs, it could see lots of heat cycles.
I don't think it would break MF to provide some form of coverage, but probably not 100%. In a worst case scenario, I'm sure MF would not consider this normal for their tractors and would investigate if it was possible in the current configuration. There are questions needing to be answered here, but none of them are related to warranty. Perhaps a recall campaign to drill holess and provide better drainage would help ensure both dealers and customers do not have to be confronted with these issues.
Those pictures you showed would not please me on a 5-year old tractor, much less one of a much younger age. Nobody here wants to think that their tractor of any age could look like that. Without positive proof, you have to take the customer's word that the tractor has not been underwater. That's what you are doing and you are providing the kind of support I would like to have from my dealer. The fact that you posted the pictures shows you have some doubts and would like to hear every side of the problem. Good for you.:thumbsup: