You can add/replace files outside of your application folder during an update, as long as the identity of the user performing the update has permissions and the file(s) are not locked by another process.

The Target Client Folder property of any of the file actions sets the physical anchor on the client computer. When this property is set to the Application Directory value, this is the folder where the assembly hosting the AppLife Update Controller control is located. You can then use the subdirectories property to navigate up or down from the Target Client Folder.

As an example, the AppLife Update install structure is:

InstallDir
\API Help
\MakeUpdate
Makeupdate.exe (Host of the Update Controller)
\PublicAssemblies
\UpdateService

To replace the API Help chm, I could use an Add/Replace files action with the Target Client Folder property set to Application Directory, and the subdirectories property set to ..\API Help