I was playing LAN multiplayer with my boyfriend and we had just killed Phaen of the Rags in Targos (the first area). After the fight was done, we went to talk another NPC and he attacked us as soon as we loaded into the area. After that we found that every NPC we encounter in every area attacks us. We thought about reloading but we don't want to lose our progress and do it all over again just to run into the same problem.
Does anyone know what we did wrong to make everybody mad at us?!

Usually something like this only happens when you damaged or killed a neutral (blue-circled) NPC, for example by accidentally hitting them with an area-of-effect spell that was meant for an enemy.

Not sure how it could have happened as a result of the Phaen of the Rags fight, though, since there are no neutral NPCs in his tent.

Did you wait for Phaen to attack you (by 'exposing' him through the correct dialog options), or did you attack him out of the blue?