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

The primary distinction between "actual cash value" and "replacement cost" coverage lies in how each method calculates the value of the insured property. Actual cash value takes into account depreciation, which means it provides compensation based on the current value of the item after accounting for wear and tear, age, and obsolescence. This results in a payout that reflects the item's value at the time of loss rather than its original cost.

In contrast, replacement cost coverage does not factor in depreciation; instead, it covers the cost to replace the damaged or lost item with a new one of similar kind and quality. This typically results in a higher payout in the event of a claim compared to actual cash value, as it does not diminish the value based on the item's condition or age.

Understanding this distinction is crucial for policyholders when selecting insurance coverage, as it affects the amount of compensation they would receive in the event of a loss.