Here's something weird that happened to me when I first tried playing Arcanum. My Halfling thief was strolling around Shrouded Hills in his dinner jacket & had just spoken to the blacksmith. I clicked near Ristezze to have him go there & in going in that direction, he walked directly through the blacksmith's fire & burned all his clothes off!!! It was very funny to watch, especially when all the shopkeepers started complaining about his walking around naked!!! Unfortunately, I had no money left & couldn't buy new clothes so I had to deal with their obnoxious comments until I could steal enough gold to buy more..
same happened to my companion only I noticed that virgil keprt healing him for some reason and there he was a living torch
i once made a quick save in a fireplace in mushrooms in i think...technically ur not supposed to be able to stand in a fireplace, but that was one of those many bugs.. the best thing was that i stood there for bout 10 seconds and after that had few points of health left so it took me some time before i could walk off quick enough after loading the game
it's simple, really- the fire damages your armor, and when it's damaged enough it becomes Broken and Unrepairable.