This settlement is for loss-in-value of your property. If the settlement is equal or less than the loss in value (the adjusted basis of your loss), then it is not taxable and you do not need to report the settlement on your tax return. But you must reduce the cost basis of your property by the amount of the settlement.
In your case, if the settlement is just enough to repair the damages, it is not taxable and you do not have report it. If you then use the money to pay for the repairs, you can add it back to your cost basis.
If the settlement is more than your loss-in-value, the excess must be reported as income.
For more information, please read this IRS document:
https://www.irs.gov/pub/irs-pdf/p4345.pdf
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