The reason is that Iceland is in the EEA. Part of the rules for having free access to the market is that Iceland has to accept EU rules. Basically they get all of the regulations but have no seat at the table. Norway is in the same boat.

- If your flight is within the EU and is operated either by an EU or a non-EU airline

- If your flight arrives in the EU from outside the EU and is operated by an EU airline

- If your flight departs from the EU to a non-EU country operated by an EU or a non-EU airline

- If you have not already received benefits (compensation, re-routing, assistance from the airline) for flight related problems for this journey under the relevant law of a non-EU country.

So pretty much all flights departing from within the EU is covered.