Last week the service stopped working on my Mac, and I kept getting an error about having to choose my SkyDrive folder. When I tried to do so I encountered an error complaining that SkyDrive cannot use a folder on a case-sensitive volume.
I double-checked my Mac's hard disk, and sure enough, it was partitioned as a single volume, using the "Mac OS Extended (Journaled)" file system. This is not case sensitive. Repairing permissions didn't fix the error.
After much googling, I ran across several other folks who've encountered the same error message, one of which indicated that running Apple's Software update resolved the issue. Specifically, there is a Mac OS 10.7.4 Supplemental Update, the description of which is
This update addresses an issue where certain new APIs for file access are not present on some systems.
So, with SkyDrive uninstalled from the Mac, I ran Software Update and installed this patch, along with several others. When it finished I restarted the system just to be on the safe side.
After getting back to my desktop I ran the SkyDrive installer and it was able to complete without issues.
So, if you start getting weird error messages from the Mac SkyDrive client incorrectly complaining about a case sensitive file system, run Software Update from the Apple menu.