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Do you have Steam and your games in 2 separate locations?
Are you able to access the folders by navigating to them yourself? Located somewhere probably like "C:\Program Files (x86)\Steam\steamapps\common\Dead Island".. There is also the folder in My Documents...
If you can access them, try right-clicking DeadIslandGame in "C:\Program Files (x86)\Steam\steamapps\common\Dead Island" and run the game as Administrator. If not, change that folder's permissions..
Do you have UAC on or off?
And if this isn't the case, I don't know what to tell you...