What is the primary difference between "actual cash value" and "replacement cost"?

The primary difference between "actual cash value" and "replacement cost" lies in the treatment of depreciation. Actual cash value (ACV) is defined as the replacement cost of an item minus depreciation. This means that when an item is insured at its actual cash value, the insurer takes its wear and tear, age, and condition into account when determining the payout if that item is damaged or lost. Thus, ACV reflects the current value of the item in its used condition at the time of loss.

On the other hand, replacement cost coverage does not deduct depreciation; it allows the insured to replace the damaged or lost item with a new item of similar kind and quality without accounting for its age or condition prior to the loss. This can often lead to significantly higher payouts since it reflects the cost to replace an item with a new equivalent rather than its diminished value due to wear and tear.

Thus, the correct understanding reinforces the distinction that actual cash value includes depreciation while replacement cost does not, making the chosen answer accurate.