Had it happen as well, with a few twists.
Attempt 1: Twas mid-game and thinking my heroes unstoppable; I fell into his pit (some lair looking building, he was not "spawned" it seems) to be greeted by this bug. Auto combat thoroughly destroyed my team.
Attempt 2: I return sometime later with improved heroes of old (instead of a building graphic, its now a graphic of the worm) to try the auto-combat roulette. It gave me the auto combat option window this time, I see if manual combat is still bugged and it was. Six of my 8 are struck down, but my best hero and Sovereign pull in the win. I get his orb and an item, but the quest is not ended, nor does the green area of influence disappear. I reload...
Attempt 3 & 4 & 5 & 6: I cast Death Ward on all my heroes........6 still die, 2 live, but this time I don't get the orb, quest stays active, green AoI stays around... Reload, do the exact same thing... accept all my heroes lived (Hurrah!)... no Orb... reload. I tried a few more times using quick combat and tactical combat to make sure its a repeatable bug, it was.
Attempt 7ish: I use my Sovereign and 1 super hero (I don't cast death ward on other heroes), they win, I get orb. Quest still does not complete though.
Saves:
http://dl.dropbox.com/u/74993502/Bug_Quest_01_Abeix.EleSav
http://dl.dropbox.com/u/74993502/Bug_Quest_02_Abeix.EleSav
