Wounds can stack, adding their penalties together and making it hard for a character to continue through combat. When a character gains enough Wounds, the party should consider Resting.
Wounds are gained when a character falls unconscious - when their Health reaches zero during combat. On harder difficulty settings, Wounds are also acquired when a character's health falls too low.
Characters die permanently if they have 10 Wounds. While an earlier save must be loaded if the Fatebinder dies, the game can continue if companions die; companions' deaths are noted in the ending slides.
As of the final patch, a bug remains in that exiting and then reloading a save will reset the number of wounds to 1 (if the previous value is higher than 1).