(Reuters) - California is turning into a battlegroundfor technology that allows auto insurers to track their customers'driving behavior and offer them lower premiums, b u t that privacyadvocates reject as an excessive intrusion with seriousconsequences.

Insurance companies are increasingly installing small boxes inclients' cars that monitor everything from how much customers driveto their average speeds to where they drive.

Auto insurer Progressive Corp, which leads the market forso-called usage-based insurance, estimates that about 70 percent ofthe people who sign up for the program drive well enough to get adiscount.

But privacy advocates say the lower premiums are not worth thetradeoffs, because the data could be used for unexpected purposeslike penalizing drivers who visit unsafe neighborhoods. Thatargument holds sway with the California Department ofInsurance, which is opposed to expanding the technology.

“While there are occasional discussions with certain insurersand vendors, the Department has no imminent plans to initiateusage-based rating factors,” said Pat McConahay, a spokeswomanfor the California Department of Insurance, in anemail.

The state's opposition is a problem for insurers. Nearly 10percent of the cars on the road in the United States arein California, and nearly 13 percent of all auto insurancepolicies are written there (more than twice the next-largeststate), making it a crucial market for the highly fragmentedindustry.

“We've been trying for quite some time now to get somemovement,” said Richard Hutchinson, general manager of theusage-based insurance program at Progressive, in a recentinterview. “It may in fact require the legislature.”

REVEALING FAST-FOOD BREAKS?

In California, changing insurance rules iscomplicated. California voters approved a law known asProp 103 in 1989, setting strict rules for how auto insurance couldbe priced. At the time, few imagined a day when insurers could pluga small box into their cars and track how, when and where theydrive.

As it stands, the only metric the state allows to be tracked ismiles driven — admittedly a crucial component of any usage-basedprogram, but not the only factor for most of them. Most programsconsider distances driven, stop and start speeds, time of daydriven, and host of other variables.

The state insurance commissioner has at leasttwo concerns about the technology: privacy issues, and fears thatinsurance companies will penalize drivers for factors outside oftheir control, such as charging more for a person whose occupationforces them to drive at night.

Lawmakers could overrule the commissioner, but it would bedifficult. To change Prop 103, the legislature would have to showany bill furthered the original aims of the proposition, and thenpass that bill with a two-thirds majority, an all-but-hopeless taskin the fractious California Assembly and Senate.

As far back as 10 years ago, privacy advocates sounded alarmsabout the misuse of automotive tracking data. The ElectronicFrontier Foundation, which focuses on digital privacy issues, hasaggressively opposed any changes to California law thatwould allow driver tracking.

“There is real danger that this information would not only beused to ascertain the political or associational affiliations ofdrivers, but also to charge more if you drive and park inneighborhoods with high vehicle theft and crime rates,” the groupsaid in a 2009 statement.

Insurers could also “link your health insurance rates withlocation data that reveals your lunchtime trips to McDonald's,” thegroup added.

PROGRAMS IN DEMAND

These may be legitimate concerns, but many Americans seem tohave either ignored or discounted the risks. At least eight of thecountry's top 10 auto insurers have some sort of program either infull rollout or in trials.

Many customers end up with lower premiums– most insurers promisesavings of up to 30 percent. And drivers may be willing to settlefor even less. A recent Deloitte survey found 52 percent of insuredconsumers would accept a discount of 20 percent or less to installthe necessary hardware.

A spokesman for Ron Calderon, the chairman of thestate Senate's insurance committee, said his office was notaware of any planned legislation to allow usage-based insurancein California, though he backs the idea.

One industry source said insurers and their representatives aretalking to the insurance department and that officials there are“open to listening to input from the industry,” but that any actualprogress is quite a way off.