Dan Kyle, a vice-president with The Crump Cos., insurance brokers in Memphis, recalls an early intimation that liability insurance was headed for troubled times.

"It was sometime in the late 1970s, when I brought a renewal proposal to the president of a small highway-construction company in Collierville, Tenn.," says Kyle." It was an important policy for vehicle-casualty coverage, but he didn't even read it. He just flipped to the back page to see the premium cost. The figure represented a huge increase, and I wasn't sure how he would take it. When he saw it, he didn't say a word. He just opened a desk drawer and took out a pistol. I stood in the middle of his office, which was really a trailer, and trembled. He finally got up, opened the door, and fired four shots into the clay embankment outside. Then he sat down again and said, 'Are you sure you can't do any better than this, son?"

Since then, conditions in casualty-liability insurance have gotten even tougher, and small business continues to bear the brunt. Fortunately, there have not yet been any reports of brokers being shot -- but this sellers' market is far from over.

Historically, the liability insurance market has behaved more or less like an accordian. Underwriters periodically go through periods of intense competition, during which the market slackens and coverage becomes cheap and easily obtainable. Then, when carriers start losing money because of excessive underpricing, the market tightens again. In the past year or so, the market has been in another tight phase and this time, it is ready to snap. In 1984, insurers suffered underwriting losses of $21 billion, the worst since the San Francisco earthquake of 1906. This year, demand for coverage will exceed the industry's capacity to provide it by about $7 billion, and the shortfall is expected to total $62 billion by 1987. In response, reinsurers, which assume some of the risks that primary carriers underwrite, have raised premiums and retreated from some lines of coverage. That, in turn, has put even more pressure on primary carriers to do the same.

These grim facts translate into astronomical premium increases for many companies, especially small ones, and there is little relief in sight. Many insurance underwriters are scrambling to get out of covering small businesses altogether, mainly because it is easier, less risky, and more profitable to sell lots of insurance to a few big, stable customers. Large corporations also generate heftier premiums for less administrative work, and thus wield greater leverage with underwriters than small companies.

The worst squeeze by far is in property-casualty liability, long the bane of small companies. "This will be the year that liability insurance becomes a real zoo," says Dennis Pillsbury, consultant to Independent Insurance Agents of America Inc. "Coverage in many areas will simply become nonexistent." Les Baumer, senior vice-president of commercial casualty at Wausau Insurance Cos., in Wausau, Wis., says, "Small-business liability is an undesirable account for an insurance carrier to have right now. The entire commercial insurance market will continue to be bad for at least the next 12 to 15 months, until carriers can improve their capital positions."

Several factors have contributed to the massive losses that underwriters are facing. In the late 1970s and early '80s, underwriters began underpricing coverage during a period of cutthroat competition reminiscent of the "gas wars" of the 1950s. Insurers could offer low premiums because interest rates were high, and profits from investments more than made up the difference. But, when interest rates started to fall, investment earnings no longer covered the gap. Last year, for example, the industry spent $1.18 for every dollar it gained in premiums, and thus needed investment income of 18? per premium dollar simply to break even. It did not come close.

This situation was further aggravated by events and trends in society at large. Well-publicized lawsuits against such companies as Manville, over diseases linked to asbestos; A. H. Robins, over injuries associated with the Dalkon Shield; and Union Carbide, for the recent catastrophe in Bhopal, India, helped to generate huge insurance losses, and to focus public attention on the issue of corporate liability. The courts started handing down broader interpretations of corporate liability, and juries got in the habit of awarding whopping settlements in liability cases. Aroused by the consumer movement, the public began hauling companies into court with increasing frequency for a multitude of alleged wrongs. Meanwhile, the glut in the legal profession led many lawyers to go after liability cases with the eagerness of ambulance chasers, or so many business-people bitterly claim. The result: an insurance industry debacle.

Now insurance customers are paying for that debacle. The deepening crisis is hitting companies of every size, in every region, and in almost every industry. But smaller companies in higher-risk industries are getting clobbered. Says David Katz, an associate editor with National Underwriter magazine, "It's going to get tough for all firms to get any kind of liability coverage. But for smaller firms, certain types of coverage are all but drying up."

"It's ride-out-the-storm time for small companies," says Brad Smith, marketing director at IBM Mutual Insurance Co., an insurance carrier in Kalamazoo, Mich., that specializes in small-business coverage. "The insurance market is bound to correct itself eventually, but in the meantime, a lot of little guys are going to suffer. Some might not survive."

Some types of insurance coverage are now almost impossible to obtain -- notably, environmental-impairment liability and pollution coverage in a general-liability policy. "Any firm that handles chemicals is going to get hurt," says Daniel Katzenberg, finance and economics editor of Chemical Week magazine. One small chemical distributor in Akron had its pollution-liability coverage abruptly canceled last March. It finally found another underwriter -- which agreed to provide one fourth the coverage at three times the price.

Product liability is another hard-hit segment. There has been a proliferation of expensive lawsuits against manufacturers of faulty, or allegedly faulty, products. Some are no doubt justified, but many appear to be flimsy nuisance claims, which the plaintiffs anticipate settling out of court. In 1974, the average product-liability award in the United States was $345,000; in 1984, it topped $1 million. According to Steve Settle, director of loss, prevention, and control at the National Association of Manufacturers, manufacturers are seeing their product-liability premiums rise anywhere from 200% to 500%. "Some premiums are going up 1,000% or more," he says.

Meanwhile, accountants, doctors, and other professionals are having similar troubles with professional liability coverage. At the same time, small trucking and construction companies are finding it hard to obtain vehicle-casualty insurance. "Since 1984, the cost of vehicle-casualty insurance has gone through the roof," says Samuel Gill, director of the American Trucking Association's finance council. "It's a major problem, especially for small firms that have a lot of vehicles and depend on them."

One such company is Olson Transportation Inc. The $18-million trucking and warehousing concern in Milwaukee had its vehicle-liability coverage canceled last April -- despite the fact that the company had a long and superb safety record. While Olson eventually found a new underwriter, its premiums have gone up 600%.

Such problems are certainly daunting, but some companies are finding ways to cushion the blow. A case in point is Garden State Brickface & Stucco Co., a $25-million-a-year brickface, remodeling, and construction business in Roselle, N.J.

As company president Larry Goldberger tells the story, it all began one morning in June when "Marty, the guy in charge of buying my insurance, came scurrying into my office. He tells me our underwriter is going to raise the cost of our umbrella insurance policy next year, from $10,000 a year to $70,000 a year. It's obscene!"

One of the major factors, it turned out, was the vehicle-casualty component of the company's umbrella policy. Garden State, one of the largest businesses of its kind in the United States, performs high-quality, customized exterior resurfacing. "Insurance carriers just lump us together with run-of-the-mill construction firms," complains Goldberger, 49. "I like to think we're different."

They may indeed be different, but in the messy, sometimes arbitrary, world of liability insurance, perceptions often count more than reality. And the fact is that Garden State keeps 160 cars, trucks, and vans on the road, all of which must be insured.

That presents particular problems in Garden State's case, because the company has customized its trucks to perform many tasks. "We made this truck over so it can provide everything a work crew needs," says Goldberger, as he inspects one of his company's garages. He places a hand on a truck that has different pieces of machinery tacked on, like a giant modular toy. "This can mix cement, supply men with sand, nails, custom metal accessories, you name it," he says proudly. "But it makes insurance people nervous."

To cope with the current crisis, Goldberger has developed a strategy aimed at reassuring his insurance carrier, in hopes of eventually getting better rates. For openers, he plans to raise the deductibles on the company's overall vehicle-casualty coverage from $500 per vehicle to roughly $2,000, and to dispense with collision coverage altogether. "We'll just have to do our own repairs," he says, adding that Garden State already has adequate garage facilities.

At the same time, he will place a greater emphasis on driver safety. Although the company, he says, has had an excellent vehicle-safety record since its founding in 1953, Goldberger believes that it can do even better. In the future, the safety records of applicants for driving jobs will be carefully screened and shown to the insurance carrier, which will be monitoring the process. Drivers who are hired will then undergo a strict safety orientation. In addition, Garden State has an in-house driver-education program, including classes and training films. It will also run various safety contests -- for example, giving awards to drivers who drive a certain number of miles without incident. Strong disciplinary measures will be taken when an accident does occur.

The effect will no doubt be to change life at Garden State Brickface in ways that Goldberger never planned, but he does not see any alternative. "Insurance used to be a relatively simple matter of having a broker place a policy with an underwriter," he says. "Now it's a matter of finding a policy that allows you to make a living."