Do you pay taxes on a home insurance settlement from a tornado?

Not exactly. Reimbursement for the loss is not taxable income....just like simply selling the property at no loss/gain would not have been income.

Common sense prevails here - what you CAN'T do is take a casualty loss for damages that are reimbursed by insurance. (The reimbursement means you didn't have a loss). To the degree you have an unreimbursed loss, that's fine. If you report a loss and then are reimbursed, essentially that would become income.