Without the code that caused the service light to be on it's all guesswork.
Things that are helpful to know:
The indicator lights are not a function of the switch position. Those indicator lights are independently wired to the TCCM and it is the TCCM that lights them according to what the range position sensor (encoder) reports to the TCCM.
Removing the ATC fuse for a minute or so resets the TCCM and clears the code and service light but if the fault is still present the TCCM will turn the service light back on and set a code right away.
For certain codes like an encoder fault the TCCM may turn off all indicator lights and disable ALL shifting of the transfer case.
Both the selector switch and the range position sensor work in a similar manner. The TCCM gives the sensor or switch 5 volts and the sensor or switch sends back a lower voltage that corresponds to given switch setting or transfer case shift motor position.
If the range position sensor (encoder) is faulty there is no way for the TCCM to know what mode the transfer case is really in. This 'could' cause the TCCM to rotate the shift motor in manner it should not ever do, like shifting into 4lo while moving and not in neutral.