One thing that you may (or may not) have noticed is that, whenever someone dies, all effects on that character are dispelled. Is there a reason that was done?

This rule has some consequences that might not have been what the developers intended:

1. If a character has been level drained and Restoration isn't available, you can cure the level drain by killing the character on purpose and reviving her.
2. You can dispel Polymorph and Shapechange without removing the end effect by killing the character. This means the character can keep the ability to shape change permanently by killing and reviving the character on purpose.

(Note that these tricks don't work for the main character because the game immediately ends when she dies.)

(As a side note, I happen to dislike the fact that characters drop their inventory on death. Makes me want to reload rather than revive the character, and I consider that bad game design.)

Only certain effects are dispelled, otherwise chunked death, petrification etc. would not be possible. The logic is quite simple, if perhaps flawed: if a person is panicked, held, buffed etc. then those effects become meaningless with death.

Characters lose their inventory because dead characters are not containers. There is no other way to retrieve their stuff, without reviving them.

The Infinity Engine does not work that way.

But it should.

(This isn't the only problem I have with the Infinity Engine. Other issues include the fact that you can't move the party as a group and the fact that you are forced to rely on the games' flawed pathfinding; you can't just use the arrow keys to move like in Ultima 6.)

Also, I thought of another odd consequence of the "dispel on death" rule:

Suppose that you are in the final series of battles in Throne of Bhaal (which does not allow you to rest between phases of the battle), and you had to have your cleric (who is not your main character) cast Greater Restoration. As a result, your cleric is fatigued and you can't rest. As far as I know, the only way you can get rid of the fatigue is to kill your cleric and then revive her. (You really should have someone else who can revive at this point in the game; remember that Planetars can cast Raise Dead, that Wish has a chance of allowing Resurrection, that druids have Mass Raise Dead, and that you should (hopefully) have a Rod of Resurrection around somewhere.)

But it doesn't. Fatigue only affects luck. It's not a big deal.

Actually, luck is a big deal, as it modifies nearly every roll. With -5 luck, for example, you will always take maximum damage from fireballs, for example. Also, expect to see a lot of critical misses if you attack. At -19 luck, your attacks will always be critical misses.

On the other hand, if you somehow got +19 luck, you would be scoring critical hits all the time. (I believe it is impossible in the Baldur's Gate series, but it could happen in Icewind Dale 2 if you abuse Lingering Song.)

No, you are completely missing the point. We are talking about fatigue. Fatigue effects Luck, and only modifies the stat every 4 hours if not removed. You cannot possibly get to maximum/minimum within the space of a single battle.

if you give that castle guy 20 bucks he'll get Larian to fix the IE and maybe at least put resurrected people's clothes back on for them! Embarrassing enough to die then you're just standing there in the middle of battle naked?

Only been an issue for me sometimes.
If someone dies and gets resurrected mid-battle, they've lost their armour and can't re-equip it until the battle ends (though weapons, etc aren't a problem so it's not a total bust).

But I've never thought it a good idea to kill and revive someone to remove a status effect - rather deal with it in a more RP way.