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Flaw, oversight. Call it what you want, but DW just doesn't handle this well. You probably need to setup two sites with each pointing to different roots. One for working with public files and the other for working above site root.
Is it a DW issue? Or the host issue? Different hosts have different ways of showing the root directory. Yours looks like HG.
I use a subfolder but still have trouble with that host, so I use a V2 folder so it's www.domainname.com/v2/testfilename.html. You have to go into the cpanel and set up a new folder then upload using the expanded view in DW so you can see where the files are going on the remote site. Don't just use "put" command.
Is it a DW issue? Absolutly! It has nothing to do with how the server is setup - I own the server and have the ability to do with it as I please. I could put my private files in a folder within the public_html, but that's just not good practice. That's why, on real servers such as Linux, the cgi-bin is not in the public_html directory (who uses cgi-bin anymore anyhow, hah!)
Oh well, no biggie -- I have never been able to use Live View so I don't know what I'm missing anyhow