Answer by SliverNinja - MSFT for Cannot read configuration file due to insufficient permissions

This happened to us when the IIS application has a Virtual Directory with a Physical Path that contains forward-slashes / instead of backslashes \. This was accidentally done using a powershell management API for IIS during our continuous delivery process.

Bad Config Example - applicationHost.config

<application path="/MySite/MyService" applicationPool="MyAppPool" enabledProtocols="http"><virtualDirectory path="/" physicalPath="C:\inetpub\MySite/MyService" /></application>

Make sure the physicalPath attribute does not contain forward-slashes /, only backslashes \

Corrected Config Example - applicationHost.config

<application path="/MySite/MyService" applicationPool="MyAppPool" enabledProtocols="http"><virtualDirectory path="/" physicalPath="C:\inetpub\MySite\MyService" /></application>