Have you stopped the web.config inheritance?
I haven't tried the scenario yet, but in this case, you should tell that the parent web.config should not be inherited by the child application. Otherwise the child system will interpret the settings from the parent web.config file, will merge them in one file and parse them in the memory. Then, it will populate the settings in the memory, and try to flush them to the permanent storage.
Please take a look at Stopping web.config inheritance.
In short, you should add the following line in the parent web.config file:
<location path="." inheritInChildApplications="false">
If you already have this node, then you should only add the attributes.
Please let me know if this fixes the behavior, if not, I will test it locally and give you another suggestion.
the Telerik team