The Southern Response chair Ross Butler has resigned following a damning report that found a private security firm acting on the crown agency's behalf made potentially illegal recordings of quake claimants.
Thompson and Clark was hired by Southern Response, which dealt with quake claims of former AMI customers in Christchurch.
The security firm is at the centre of a major inquiry conducted by the State Services Commissioner.
The Greater Christchurch Regeneration Minister Megan Woods said she accepted the resignation of Southern Response chair Ross Butler tonight, following the release of the report on the agency's use of external security consultants.
Mr Butler has also resigned from his roles on the boards Otakaro Ltd and Regenerate Christchurch.
Ms Woods said an interim chair will be appointed in coming days.
"Early this year, I saw emails between Southern Response and the private investigation firm Thompson and Clark. These emails were concerning and I reported them to the State Services Commissioner who launched the investigation that has reported back today," Ms Woods said in a statement.
"The actions by Southern Response revealed in today's report do not meet my expectations as Minister.
"I acknowledge that Southern Response originally hired Thompson and Clark out of legitimate concerns for staff health and safety. That is appropriate. Every New Zealander has a right to be safe at work.
"What the report makes clear however is as the process went on, surveillance was increasingly used as a tool for reputation management, not for the protection of staff safety," the minister said.
"Secretly infiltrating private claimant meetings and recording closed door conversations without anyone's knowledge are not appropriate ways for Government entities to manage their reputations.
"These actions were wrong, plain and simple. They are unacceptable to me and unacceptable to this government.
From 13 March 2014, Thompson and Clark, working on behalf of Southern Response - the government's insurance agency working for claimants of the Canterbury earthquakes - attended and recorded several closed meetings of insurance claimants.
State Services Commissioner Peter Hughes has complained to the police about the recording of meetings and has lodged a formal complaint with the Private Security Personnel Licensing Authority in regard to using an unlicensed private investigator.
He has also recommended Thompson and Clark be removed from the government's procurement panel, which the chief executive of the Ministry of Business Innovation and Employment has done.
Southern Response had also had a complaint laid to the police against it.
The investigation also looked into Thompson and Clark's reporting to government agencies on "issue motivated groups" which treated these groups as a security threat.
Among the groups were Greenpeace, the Mana Movement and some iwi groups in Northland, the East Coast and Taranaki.
"What concerns me the most is that Thompson and Clark has treated 'issue motivated groups' as a security threat in its reporting to government agencies," Mr Hughes said.
"I am very disappointed that agencies did not challenge Thompson and Clark on this. That is not consistent with how we should view democratic freedom."
In a brief statement, Thompson and Clark director Gavin Clark said he had had the report for less than 24 hours and it would take some time to consider it.
"The report has also confirmed that much of the work we conducted for government agencies was within their SSC code of conduct.
"We accept the findings that some processes around how and when some work was carried out could have been more stringent. An internal review of this is already underway but we maintain that there is a legitimate place for the work that we do, to help agencies keep their people safe.
"There are some findings we do not agree with, as noted in the report, as they don't reflect the understanding that our industry and its code operated to in years gone by. We will explain our disagreement with those findings to any future investigations that may result from this report."
Mr Clark said the company had co-operated fully with the inquiry.