The family Tenrecidae (tenrecs) is one of only four extant terrestrial mammal lineages to have colonized and diversified on Madagascar. Over the last 15 years, several studies have disagreed on relationships among major tenrec lineages, resulting in multiple reinterpretations of the number and timing of historical transoceanic dispersal events between Africa and Madagascar. We reconstructed the phylogeny of Tenrecidae using multiple loci from all recognized extant species and estimated divergence timing using six fossil calibrations within Afrotheria. All phylogenetic analyses strongly support monophyly of the Malagasy tenrecs, and our divergence timing analysis places their colonization of the island at 30–56 Ma. Our comprehensive phylogeny supports three important taxonomic revisions that reflect the evolutionary history of tenrecs: (1) we formally elevate the African otter shrews to their own family Potamogalidae, thereby rendering extant Tenrecidae entirely endemic to Madagascar; (2) we subsume the semiaquatic genus Limnogale within the shrew tenrec genus Microgale; and (3) we re-elevate the two largest-bodied shrew tenrecs, Microgale dobsoni and Microgale talazaci, to the genus NesogaleThomas (1918). Finally, we use recently summarized habitat data to test the hypothesis that diversification rates differ between humid and arid habitats on Madagascar, and we compare three common methods for ancestral biogeographic reconstruction. These analyses suggest higher speciation rates in humid habitats and reveal a minimum of three and more likely five independent transitions to arid habitats. Our results resolve the relationships among previously recalcitrant taxa, illuminate the timing and mechanisms of major biogeographic patterns in an extraordinary example of an island radiation, and permit the first comprehensive, phylogenetically consistent taxonomy of Madagascar's tenrecs.