Poor workmanship has forced inspectors to double the number of random checks and introduce tough new penalties under the Government's popular home insulation scheme.
Gaps in insulation - which can cut performance by half - and fire risks were found in houses the Energy Efficiency and Conservation Authority checked after they were fitted out under the Government subsidy.
Of 570 checked in the first round of audits, inspectors found problems with 359 - 17 of which were fire risks.
A spokeswoman for the authority said about half the problems were relatively serious quality issues, including a number where gaps had been left. The rest were minor, such as missing labels or product information.
She said EECA was randomly checking 5 per cent of the homes insulated under the Warm Up New Zealand scheme, which provides up to $1300 towards a third of the cost of insulation in pre-2000 houses.
Because of the problems found, it had decided to double-check 10 per cent of houses and bring in a "three strikes and you're out" policy to weed out poor installers.
The Warm Up New Zealand scheme has been hugely popular, with almost 26,000 houses fitted out in the first half-year.
Installers must do their own checks when they have finished and if there are any problems, they must pay for them to be fixed.
The first round of independent checks found 17 homes in which the insulation was covering heat sources such as downlights or extractor fans - which has been blamed for a spate of fires in Australia.
EECA has said the product involved in those blazes - macerated paper - is not approved for use under the NZ scheme, and homes here that were found to have heat sources covered were all fixed immediately.
As a result of the audits, it made all 60 businesses approved to install insulation under the Government scheme go back and check that any downlights and fans in properties were not covered.
Since the first audit, 47 more houses had been checked and no fans or downlights were covered, the spokeswoman said.
Australia's Environment Minister has temporarily banned use of foil insulation under its government scheme after shoddy installation was linked to four deaths.
New Zealand officials say this country is unlikely to suffer the same problem because foil insulation is not widely used here and is not covered by the government subsidy.
David Kelly, deputy chief executive of the Department of Building and Housing, said foil was sometimes used under the floors of new houses but this was a "very safe situation" because it was laid during construction.
In 2007, NZ had its own spate of insulation-linked deaths - three people who stapled through electric cables while installing do-it-yourself foil floor insulation.
Since then, the Government has discouraged home handymen from installing it.
EECA's website warns that poor installation can reduce insulation's performance by up to 50 per cent.