I'd use the game over screen only in the eventual death of the whole party, even if you somehow screw up the main quest. Though I don't know how that would be signified, in Morrowind, if you killed a plot critical NPC, a text pops up telling you that you have inadvertently failed your "destiny" and should probably reload if you want. You can continue playing normally though, you just can't complete the main quest anymore.
Well, Larian has a design philosophy that you can always complete the main quest, even if you kill everyone. So the only ultimate fail state would be death of the whole party, yes. Which is fine, but I also like how they're letting you resurrect at the graveyard so long as not everyone in the party has died, though that of course has to have limits to not make death completely trivial.
I say on death, you lose all source points you had, and you lose some reputation, and maybe some gold or something. However, not sure if deaths at the hands of other players should affect you the same, especially in the likes of the arena. And maybe the more times you die, the more punished you get.
I also think some kind of intangible punishment for death would be cool. Like, every time you die, your soul slightly fractures, increasing the chance that your soul will be destroyed when you finally die permanently (instead of reborn into a new creature, like most souls). Could have little or no gameplay effect, or maybe it affects something at the end of the game, like the final outcome of your character.
