Excess wounds caused when attacking characters are normally discounted because all the effort of these attacks goes into fighting the character. As any excess wounds are not inflicted, they are not counted towards the combat result. However, any excess wounds scored when fighting a challenge do count towards the combat result (up to a maximum of +5), even though they are not actually inflicted. This is called the overkill rule.
For example, a Lord-level character and his dragon fight a champion in a challenge. They slay the champion before he has a chance to attack and cause seven wounds on him! Their combat result score is 1 (the original wound of the champion) plus 5 (the maximum overkill bonus) for a total of 6 combat result points. The last of the seven wounds is wasted.
This represents the situation where troops are watching their hero battling for his life against his adversary. All eyes are focused on the mighty clash and both sides are yelling encouragement. If the troops see their champion crushed to a bloody pulp before their eyes, they will inevitably get a bit upset and might decide to turn tail and run rather than stick around for a dose of the same.
In practical terms, the overkill rule means that it is an advantage to crush a challenged enemy as overwhelmingly as possible. It also means that players will benefit if they meet a challenge with as powerful a character as possible.