Interesting perspective. It's seems like the 2 Big Problems would be 1) When you kill characters who repeatedly come up, there are problems in normally scripted events, and 2) if that character were to disappear, how should the world react?
As far as one goes, I had never thought about it. I don't think it would be too hard to code for that kind of situation, especially because it would seem like an obvious room for error.
As far as two goes, that's another reason to have well scripted, generalized NPC interactions. Not only should characters have dialogue in case Martin dies, but also Joe Dunmer down the block. A logarithm made up of {# of times NPC1 "talked with" NPC2} x {# of times NPC1 talked to NPCX about NPC2} x {average geographic proximity of NPC1 and NPC2} x {# of NPCX's who have data of the previous types) would determine the level of dialogue to use.
In Martin's case, Jaufree would have a lot to say because he had "talked with" Martin a lot, talked to you about Martin, was around Martin at the priory, and because many NPCs eventually "learned" about him. A commoner in the streets would only have the (# of NPCX's "aware" of Martin) to base his dialogue on.
I realize that all seems complex, but it really is the future of AI, essentially giving NPCs more "memory," concerning the Player as well as other NPCs. If implemented, you could hunt someone down by asking other NPCs, with no needed scripted dialogue.