Yeah, but the outcome of the main quest should be different if you kill everyone, I just used Morrowind as an example where you *could* screw up. Also "punishing" is not a concept that should be employed. Incentives should be given for characters who don't die, rather than punishing those that do. It may sound like "dumbing down", but the reality is that most "punishments" in games are cheap and annoying more than anything. It's enough if you have to go and resurrect characters at the GY.
