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2004 gmc
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Surely a bad thing that can damage components or cause a loss of control on corners. 2002 were notorious for having bad TCCMs, but the failure mode was a failure to initialize upon ignition start, not a failure to accurately read the switch position.

Recommend you change the switch first, since it's cheap nowadays, even from the dealer, after a 2005-2006 redesign for better reliability.

Also, how many miles do you have, and (since I always ask, even if it's not specifically related to the problem at hand) have you changed the transfer case fluid as required every 50K miles?
 
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