I don't see why him having a unique item means he should remain essential. Other NPCs have items as part of that quest and aren't marked as such. Being marked as essential in Morrowind means that an NPC is important to a particular quest and their death will negatively impact that questline, which his death does not. Crazy Batou also was that way in the base game, before the Museum quest and Tribunal were even a thing.
Bethesda was probably planning to include him in some quest and just forgot to remove his flag when they scrapped it. Leaving it the way it is just confuses players, since you get the whole "thread of prophecy being severed" message that makes people think they've messed up their save.
if a player is using the Morrowind code patch option to dispose of a corpse without looting, the artifact can be lost forever and you cannot use it to finish the museum quest. it is not game breaking, but I think an ambigue message is better than a possibly broken quest for a patch mod. Or you could script him to add the artifact to the player when he is dead and you activate it, fixing both things (the ambiguos message and the possibility of breaking a quest).
I have added the MCP version in the optional files. A script was added to Crazy Batou which will give the player his special helmet upon activating his corpse.
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Bethesda was probably planning to include him in some quest and just forgot to remove his flag when they scrapped it. Leaving it the way it is just confuses players, since you get the whole "thread of prophecy being severed" message that makes people think they've messed up their save.