Obviously they must have done something very bad in their previous life as an animal with free will! Maybe they tortured someone as a human.

I don't believe this explanation, but reincarnation usually comes along with karma in a package.

You are right caterpillar, and similar beings dont have much choice, whatever they do they are mistly dictated by nature and they have to act accordingly. That is why there is no karma for them. They cannot create any karma or 'sin' BUT they can suffer the reactions of the bad karma they have done in past life (in a species when they actually had the intelligence to differentiate between right and wrong).

A crude example: A man torturing a caterpillar for fun, may have to take birth in a life of caterpillar and endure the same pain, either by a human or different species.

Thanks for the good question, am open to more.