In The Sworn Sword, Ser Eustace is able to assemble a dozen fighting-men from his three tiny villages composed of no more than “a handful of hovels”. According to the 1% rule, this would mean he rules over a population of 1,200 people. Surely that can’t be the case?

I wouldn’t call that a dozen fighting men, I’d call it a dozen complete amateurs with no training or equipment. Yes, some levies are like that (see Septon Maribald) but most at least have a spear with a metal blade, a proper wooden shield, and a helmet. What Eustace is doing is taking much more than 1% of the available adult male population to make up for his lesser lands, which would potentially be ruinous to those villages if they die.

Compare his forces to the Red Widow’s thirty-three fighting men, including twelve heavy cavalry (six knights and six squires), and a dozen mounted crossbowmen. This suggests that the Red Widow has ~3k-4k people. 

And since Coldmoat has 20x the number of smallfolk as Standfast, Eustace has a population of 160-odd smallfolk. Divide that by half to get the number of men, and then divide that by about a third to get the number of military age men, and you’ve got 27-28 men. Eustace is risking almost half his adult male population in this fight.