Basically, if Fletcher/EQR are undertaking a repair and discover damage not covered by the Earthquake Commission Act (i.e. pre-existing damage), they may choose to cash settle part or all of the claim. This will be a tricky area to have certainty over. The EQC view is:
A referral for repair to Fletcher EQR is not a final decision by EQC to repair the relevant property. Where damage comes to light during the Fletcher EQR process that is not insured nunder the Earthquake Commission Act 1993, EQC may cash settle part or all of the claim; and EQC will only make a final decision to reinstate any part of a property with damage or issues ot covered under the EQC Act when it commences or continues to repair the relevant part of the property with full knowledge of the particular damage or issues not insured under the EQC Act.
You can find this part of the FAQ here.