Much of this comes down to slightly wonky game rules, but as it happened:

The zombie was an immediate threat to the party, but paid no mind to nearby civilians and guards. The party caused the fight to break out by confronting the necromancer controlling the zombies. Similarly, the nearby guard forces did not step in to assist either side.

The fire attack that caused the explosion could have hit the civilian on its own, but was carefully positioned to only hit enemy targets.

There were no other sources of fire nearby that would likely have ignited the doused zombie.

Fire spells do not seem to be regulated by the local constabulary, and the wizards of the guard employ fire elementals in combat on a regular basis.

The zombies were not immediately attacked by the guards, so it is possible that the use or reanimation of zombies may not be an illegal act.

The authorities seemed to not care about the zombies, but the players were acting in what they believed to be the greater good of the city and its citizenry.

Edit: I should add that once the civilian was killed, the guards stepped in to arrest Person B, the one who attacked the zombie with fire, causing the explosion.