Nav apps on phones will use dead-reckoning if they don't have a GPS signal, so they don't really even need the wheel-speed sensor, but I'd guess they use it just to increase accuracy.. e.g. in a long tunnel.
Increasing accuracy is a wild understatement. Dead reckoning with mobile phone hardware won't give you a usable result for long. Maybe your experiences are from tunnels with dedicated beacons to tell the phone where you are.
Most vehicular tunnels aren't too terribly long, if you're stuck in one in traffic, yeah dead reckoning drifts quite a bit. But if you're driving through one for a minute or two, it's sufficient.
On a side note I've personally had bad experience with beacons in train tunnels telling me I'm miles away from where I'm actually at.
