Quote Originally Posted by Foz
1. Know for certain that you had a priest or more there, and that one went missing.
2. Rule out him dying from any cause, which as the game progresses I must say I'm not exactly inclined to look at that particular info scroll that tells me who died and why.
3. See the new heretic move out of the city.

That third one is especially tough: if you just notice him in the middle of some woods the next turn, it's usually not obvious at all that he in fact came from the city and got to move already. Anyway, that's my 2 cents on why so few people have been able to report that priests can go heretic while inside a city.
This was the early game, and therefore had few priests. I was actually in the process of building up my religious army...

Now, baghdad had a high percentage of heretics, and a heretic roaming about as well. As it also had a lot of people, that meant I had to convert them before I invaded. I built an imam in mosul, and hit end turn. Same thing happened to me as Quillan. Out popped a heretic, and I had no imam. Same thing happened the next turn, but on the third turn I got my priest, who then burned the other two....

So no, being in a settlement does NOT make you immune to heresy.