That was the official excuse, yeah, because the AI in the game itself was nothing like what they were boasting about in the interviews. Honestly if NPCs killing each other was an issue there would've been ways around that. I don't buy it.
You mean making important npcs essential? Yeah, they did that. However having all the npcs in the game essential wouldn't be a solution, so that didn't work. You can see what happens even with the scaled down AI with City Swimmer, or when the "sleeper agents" transform and attack you later in the game. Fights start, in one case for me involving most of the Market area in the IC and leaving a lot of bodies behind, including a few shopkeepers. Only guards named "guard" respawn, so I ended up reloading. With the "not turned down" AI, they found scheduling everyone for lunch at one time was an equally bad idea; once the food was gone from one tavern everyone left to find food somewhere else. Or they tried to pickpocket, which caused other problems when guards intervened. There was one quest with skooma dealers where they never found the npc they needed alive, because they were killed for their stash. Part of the problem is that the game still goes on, even when the player isn't present; may not happen as fast as it would with the player present, but "life" goes on, the npcs like City Swimmer do their thing, and the guards do their thing, and you find dead npcs around. Of course, you can also use this to your advantage; the one DB guy for me is always killed by the guards, the beggar, and usually a Mage or two. Once he shoots at my pc and hits a guard, everyone joins in while I go up out of the way and watch.
There was a compilation of developer quotes on one site; one of the devs explained the problems they were having with it.