Generally, this term applies to any minor damage your phone might encounter that doesn’t inhibit any of its functions. This usually means things such as scuffs, scrapes, or chips that occur when your phone is dropped or encounters something sharp. Over time, it’s almost a guarantee that your phone will sustain some cosmetic damage – no matter how careful you are.
However, cosmetic damage is quite a difficult term to define exactly, because what counts as cosmetic damage to you may not to someone else. For example, a phone with a cracked screen may just be cosmetic damage to one person, but to another it’s a broken screen that they can’t live with and have to get repaired as soon as possible.