We are receiving compensation for a fire at a commercial property. It doesn't include depreciation, so in order to file for the replacement value, we have been advised to set up a fictitious company that will bill the insurance company, we will receive the full replacement value, and won't have to do the full scope of work. Is this legal?

This could get you some serious jail time…
Insurance companies have heard all of this before.
It won't be hard for them to find out that this company was just created and the trail back to you will be a short path.
Attorney's fees and the like would make whatever you gain look like lunch money.
I would just take what you are offered and leave the fraudlent stuff alone.
Insurance companies have lawyers on staff who do nothing but search for this kind of thing
and if you are caught Lord help you!