When Frank's structure is destroyed by fire, how much will the policy pay?

The policy will pay the lesser of the insured amount or the actual cash value of the structure, which is why this choice is the correct answer. This type of coverage is typical in many property insurance policies and serves to protect insurance companies against paying out more than the property is worth at the time of loss.

If the structure's actual cash value at the time of the fire is less than the insured amount of $40,000, the payout will reflect that lower value, recognizing depreciation and market conditions. Conversely, if the actual cash value happens to be equal to or greater than $40,000, the insured amount would be paid. This framework helps ensure that claims are handled fairly, taking into account both the insured amount and the actual value of the property at the time of loss.

Other options might suggest fixed payouts or only covering full amounts, but those do not align with standard insurance practices regarding property loss valuation.