When calculating depreciation in a replacement cost policy, what is subtracted?

In a replacement cost policy, the key principle is that it covers the cost to replace an asset with a new one of similar kind and quality without considering depreciation. This means that when calculating the payout for a covered loss, the insurer bases the reimbursement on the current cost to replace the item at today's prices, rather than deducting for any depreciation, such as wear and tear or obsolescence.

Thus, in a replacement cost framework, there is a clear understanding that the focus is on the replacement value rather than the depreciated value. Therefore, the appropriate approach in this context is to recognize that no depreciation is subtracted from the replacement cost, and this is why the answer reflects that depreciation does not play a role in determining the value covered under such a policy.