Like with the dragon, a cutscene plays where the dragon takes off and then incinerates your entire party - No combat starts, you just die. There is precedent for this with Planescape Torment, certain actions lead to no-combat instant death.
I'm not sure about this. Yeah, stupid decisions should have consequences, but insta death is just frustrating, nothing else. You should at least get the chance to fight the dragon when it attacks you, even if your chances of survival are slim. In a tabletop session, players would be outraged if the DM said 'and you all die, no combat, the end.'