Nick Xenophon does flood levy deal with Julia Gillard

The deal gives her the last vote needed to secure passage of the legislation through the Senate.

Disaster relief rules will now be redrawn to force state governments to take reasonable steps to obtain insurance cover for public assets such as road, bridges and schools.

While the levy will now go ahead, Senator Xenophon said the changes to disaster payments were a big win for taxpayers in the longer run.

"Of course we must find the funds to rebuild Queensland this time," he said.

"But this overhaul will also mean we won't have to find as much money if disaster strikes anywhere in Australia ever again."

The independent senator had been highly critical of Queensland's reliance on Commonwealth assistance, prompting the state's Treasurer, Andrew Fraser, to accuse him of "pimping" for the insurance industry.

But Senator Xenophon said the changes he had secured were about "sending a clear message to all state and territory governments that the days of gambling with other peoples' money are over".

"I want to be clear that my beef was never with the people of Queensland. It was only ever with the Queensland Government which failed to protect both Queensland and federal taxpayers".

The agreement clears the way for the $1.8 billion 12 month levy to pass into law and commence operation from July 1.

However the delay and independents' demands for a short Senate inquiry to examine the legislation, means it will not clear the upper house until the next sitting week beginning March 21.

The deal is also a victory for Ms Gillard who is keen to build her political authority having declared 2011 her "year of delivery".

And it is a loss for the Opposition, which campaigned hard against the special levy arguing voters would not support another tax despite opinion polls in the wake of Queensland's summer of disasters showing a slim majority of Australians supported it.

Senator Xenophon said that under amended National Disaster Relief and Recovery Arrangements it would now be "almost impossible" for state governments to opt out of taking out proper disaster cover because their eligibility for Commonwealth assistance would be scaled back.

The changes means states would only be eligible for the full 75 per cent Commonwealth disaster relief funding, after meeting certain requirements.

Among these are that they would have to agree to independent assessments of their insurance arrangements, the first of which must be completed by September 30, this year.

States must also satisfy the federal Government that they have adequate capital reserves "or access to capital to fund liabilities or infrastructure losses before being granted access" to Commonwealth funds.

Senator Xenophon predicted the new arrangements would protect taxpayers by forcing states such as Queensland and Tasmania, as well as the two territories, to prove they had taken all possible steps to minimise financial risk and obtain adequate insurance.

The breakthrough came after tense negotiations which had dragged on over four weeks and only concluded late last night in the capital.