This is clearly a bug.
I have been using the connection manager class.
If you use an instance db then the database name part of the connection string is of the form:
However if you leave this as this in the web.config this is returned as Server\Instance which is correctly identified as an invalid connection string.
You need to record this as Server\Instance so that it will return the result ServerInstance.
Why should an xml based config tool start escaping data that is entirely valid xml?