In 2010, the police department in Rutledge, Tenn., was riven by scandal. The police chief, a 12-year department veteran, had been charged with assault and was under investigation by state authorities. But that wasn't what Mayor Danny Turley cited when he fired the top cop that year. Turley "had no choice," he said--his "hands were tied"--because the city could have lost its liability insurance if the chief kept his job. That would have left Rutledge responsible for paying out on future lawsuits, potentially crippling its small budget. So the insurance company got its way, and a police officer got an...