I remember this being a problem when I purchased the game back in 97 or 98. I seem to remember that Sierra released a patch and I was able to actually complete the quest at one point.
Now that I think about it, there was another quest a few chapters later that was glitched as well. One with a character named Naomi and her brother's garden. If you play to that point, you should probably skip that one. Unless you have the patch it will crash your game.
Edit: With a little bit of research, I was able to find the patch to update from ver 126.96.36.199 to ver 1.1.0, but when I run it I get a file mismatch error.
I just joined GoG, so I don't know--Is there a reason it won't update? Shouldn't this be the type of thing they normally take care of so I don't have to mess with a slew issues and patches?
Edit #2: I just looked at another thread here: http://www.gog.com/en/forum/krondor_series/bia_error/page1
At the bottom a blue man says they are working on putting up the patched version asap. Guess we all just need to wait a bit longer.