The Illinois Supreme Court overturned the 1999 verdict in Avery v. State Farm in which a $1 billion settlement was levied against the insurer in a class-action lawsuit. The suit, which was brought originally in 1997, alleged that State Farm specified the use of substandard parts to repair damaged vehicles and by doing so deceived policyholders.

Chief Justice Mary Ann G. McMorrow delivered the opinion of the court, filed on August 18, 2005, stating that "the circuit court was incorrect in concluding … that the question of uniform contractual interpretation should be decided at trial rather than at the class certification stage … The reason why this question should have been resolved during the certification stage is that, had the court answered the question in the negative … the class could not have been certified [as a class-action lawsuit]."

Additionally, the Supreme Court ruled that the circuit court erred in its decision to file the case as a class-action, citing that not only are the two policy options forms that State Farm offers different, but one also contains verbiage that is the equivalent of an "an explicit agreement between State Farm and the policyholder regarding the use of non-OEM parts: 'You agree with us that such parts may include either parts furnished by the vehicle's manufacturer or part from other sources including non-original equipment manufacturers.'"

In having two separate policy options, the Supreme Court ruled that "there is simply no evidentiary support for the lower courts' conclusion that all of State Farm's various policies are uniform." Without uniformity among the plaintiffs in the lawsuit, the alleged conduct of the insurer could not have a uniform effect on its clients and a breach of contract could not be pursued, according to the Supreme Court, because some policies did have the language that would require them to pay the difference for OEM replacement parts.

"We note initially that there are serious questions as to whether the breach of contract verdict may be upheld for any group of class members," the opinion continues. "Under the verdict form given by the circuit court, the jury found that "defendant State Farm failed to perform its obligations under the contract and breached its contract with the plaintiff class. This verdict followed naturally from the jury instructions, which stated that there was a single contract at issue with a uniform contractual obligation."

The Supreme Court concluded that because there was no single contract, but rather multiple policy forms, the verdict was improper. However, the opinion did continue to state that the Supreme Court did not decide to overturn the verdict just on the breach of contract issue alone.

"Instead, we also look at the individual relevant policy forms and consider whether plaintiffs established a breach of any of them. We also consider whether plaintiffs established damages," the opinion reads. The court ruled against both prior decisions with respect to these points.

The court found that there was no breach of contract with regard to Massachusetts policies because they contained language that indicated the company would pay "the actual cash value" of "parts at the time of the collision," and the "assigned risk" policies promised to pay "an amount necessary to repair or replace the property." Additionally, because of "you agree" and "pre loss" language included in some policies, the Supreme Court wrote that it "could not affirm the jury's verdict with respect to a subclass of policyholders who were insured under these provisions … In other words, the insured agrees that the 'pre-loss condition' promise may be met by specifying non-OEM parts."

Part of the original case included the argument that specifying non-OEM parts was a breach of contracts that included the "like kind and quality" language; in looking into this issue the Supreme Court noted in its opinion that the policies included in the original case, only "pre-loss condition" and "you agree" language was found for three of the five named plaintiffs, and that without the policies of the other two named plaintiffs available, "it is unclear that the contracts of any of the named plaintiffs contained the 'like kind and quality' language. If none of the named plaintiff's policies contained the 'like kind and quality' language, State Farm could not have breached this provision in any of the named plaintiffs' policies."

In light of this, the Illinois Supreme Court justices considered the argument further and ruled that even with the "like kind and quality" language, State Farm may not have breached its contract by specifying non-OEM parts.

"First, the language of the promise itself contradicts the view that State Farm may meet its contractual obligation only by specifying OEM parts. If the purpose of State Farm's promise 'to repair or replace the property or part with like kind and quality' were to require the specification of OEM parts, then there is no reason why the indirect phrasing 'like kind and quality' would have been used," the opinion states. The justices further ruled that the plaintiffs' belief that "like kind and quality" and OEM parts were equal was in error.

The court ruled in favor of State Farm's assessment that "pre-loss condition" is what defines "like kind and quality," in as much as the later phrase means "sufficient to restore a vehicle to its pre-loss condition."
Additionally, the court ruled that the plaintiffs failed to establish damages.