My own models use different styles to mask possible ugly effects caused by these limitations.
Most important, my models aren't really textured, in the sense that I'd make an comprehensive UV-map and draw texture. I just keep seams to a minimum and basicly assign colours to surfaces.
an old example (unit has only 6 colours)
result ingame
This way, for instance, the clipping of an arm into a torso looks not bad at all to me. Sometimes models movements are simple enough to avoid clipping altogether.
Another example to mask this joint if I thought it to be to ugly otherwise, is to dress it with some sort of shoulder pad or armour.
I must admit, it might be considered hackish and sometimes it might pose little more of a challenge having to consider these kind of things while modelling.
But I think cutting up a finished model to suit it for Spring, isn't that much more work then rigging a model with an internal skeleton.
As for a caterpillar like model, I imagine some same coloured blobs representing bodysegments, wiggling back and forth while it walks.
And the tail segment wiggling from side to side i guess.
If needed i could make a relative detailed drawing of this.
If al fails, the need for tiny legs might arise, but i think they can slither while moving as well. If you make something, decide yourself. No fun without artistic freedom, i think. For now I'm going to try to get some sleep.
