A bakery shop that claimed for costs related to a fire at a supplier’s premises has won a dispute before the financial services ombudsman.

The decision comes after insurer AIG refused the claim, saying the shop’s policy did not respond because its own premises were not damaged and the claimed costs were not “necessary and reasonable”.

The bakery shop claimed the costs as an increase in cost of working under its business interruption cover.

The store did not make its own goods, relying solely on one supplier.

When fire damaged the supplier’s premises in September 2024, the bakery shop agreed to help the supplier set up and pay for a temporary kitchen, costing $2000 a week. The arrangement was still in place when the Australian Financial Complaints Authority heard the case in June this year.

The shop owner claimed for the cost of renting the kitchen, but AIG said the increased cost of working did not fall within the policy definition of loss of gross profit.

Since the business was solely retailing, it was unreasonable and unnecessary for it to rent a kitchen and become involved in production, the insurer argued.

But the shop said its reputation could be affected if it changed suppliers.

The supplier was operated by the father of one of the shop’s directors, but the two businesses were separate entities.

In its dispute ruling, AFCA says the policy covered loss of gross profit resulting from interruption or interference with the business because of damage. It finds the business did suffer damage and the policy should respond.

The extra costs were necessary and reasonably incurred for the sole purpose of the business avoiding or diminishing turnover.

AIG must cover the cost of renting the kitchen up to $80,000 – which is 20% of the sum insured for gross profit, minus deductions but plus interest – and pay $5000 for professional fees.

Read the determination here.