The armour is not changing how much I get hit for in dungeons. Rats always do 8 damage regardless if I have leather or reflective armour. Is this a bug?

It is, yes. The PC remake of Ultima I, which is the version GOG offers, does not recognize armor when fighting in dungeons. If there's a fix for it out there somewhere, I'm afraid I'm not aware of it. But that's part of what makes the Ladder-Up and Ladder-Down spells so useful!

Alright thanks, its kinda annoying but those spells come in handy! Ive already gotten all the gems... Stupid gog sales making me buy games that suck up all my time!