I was able to reproduce this problem today and found this thread while researching a solution.
The issue occurs for me when running an application directly, resulting in the file:// URI scheme instead of http://.
For instance, we have a Silverlight application ("Project") and the host application ("Project.Web"). In Visual studio, right-clicking "Project" and choosing Debug -> Start New Instance
causes the error, whereas right-clicking "Project.Web" and choosing Debug -> Start New Instance
I believe the problem is that "Project.Web" project contains the HTML object element with the required:
<param name="windowless" value="true" />