Quests are usually chained and NPCs who represent a step can certainly die, I've seen it happen several times now. Dragons AOE breath likely ignores NPCs asking for mercy by the way which is how most of them die I assume. As an example, I had a quest to retrieve an item from an orc outpost and when I arrived there was a dragon attack underway. One of the orcs died and the quest immediately failed. A dragon also managed to depopulate half of Riverwind in my game, including a few people involved in quests. It's a bit odd how the game treats everything related to quests and companions. Some monsters will ignore my companion when they go down on one knee but others will just kill them. Oh well, it wouldn't be an Elder Scrolls game without funky NPCs and scripting.