thanks Jeff,
As a check whether I understand what you are saying, i'll try to reformulate it in my own words:
Create a new dll, let's call it 'dbconfig.dll'. This gets the responsibility of reading the configuration file 'dbconfig.config'. The new dll and the corresponding config file are deployed somewhere (the same folder as the one where the application is deployed).
Reference the new dll from the service (and all other apps that need the configuration). When deploying add the private probing path to the app.config of the application so the service can find the dbconfig.dll.