Generally, a Rental Dwelling Insurance Policy includes up to 85% of lost rents for anywhere from the end of the current lease, to 6 months (usually, whichever is less). In my limited knowledge on how the payout is reported, the amout of the payout that is specifically and explicitly for lost rent as I understand it, is reported to you on a 1099-MISC with the amount of lost rent paid reported in box 1. It's reported as rental income as if a paying tenant pay it, because rental income is exactly what it is.
When reporting the insurance payout proceeds for the loss, the monies paid for lost rent is not included in that amount, since it's already reported for the rental income it is.
