Which of the following statements regarding actual cash value is TRUE?

Actual cash value is defined as the cost to replace an item minus depreciation. This method reflects the item's current worth rather than its original value or the cost to replace it with a new item. Because depreciation takes into account the wear and tear, age, or obsolescence of the item, this means that actual cash value typically is less than the replacement cost, which is the amount needed to buy a new item of similar kind and quality without deducting for depreciation.

While other answers might suggest possible relationships to actual cash value, they do not accurately convey the established definition. For instance, actual cash value does not ignore depreciation, nor is it guaranteed to be the highest settlement amount—this is contingent on various factors including policy terms. The relationship between actual cash value and market value can vary as well; while actual cash value may sometimes be higher or lower, it's not a definitive rule that it will always be higher. Thus, the statement about actual cash value being less than replacement cost accurately captures the significant aspect of how actual cash value is determined in insurance claims.