Yes - these money should be reported - that doesn't mean the total proceed is taxable.
Generally - you need to identify the fair market value of the house before it was damaged and the fair market value of the house after it was damaged. It the property was a total loss - that value would be zero.
The difference would be your casualty loss.
If the amount of insurance compensation is less than your casualty loss - you may claim a deduction for the difference.
If - however - the amount is more than your casualty loss - the difference is your gain and it is taxable.
You may find more details in the IRS publication 547 - http://www.irs.gov/pub/irs-pdf/p547.pdf
Let me know if any clarification is needed.