From what I have read in the forum so far, many players are having trouble trying to enable co-op mode for Dead Island. This guide is created just for that purpose.
What you need to do?
1) Installed all 3 updates (RELOADED).
2) Installed SmartSteam 1.41-fix.
3) Installed Tunngle.
4) Added DeadIslandGame.exe in Steam via 'Add a non Steam game' option.
2) Open steam_appid.txt under your Dead Island game directory. If the content is a number 91310, change it to 57940 (which is the game id for Dead Island). Afterward right click on the files > properties > tick on the 'read only' mode. This is to prevent Steam from changing the content back to the original one.
NOTE: This will solve the problem in which the Game Lobby is being greyed out in the main menu.
3) Launch Tunngle and type Dead Island in the search box. Select any room to join. Click the 'Forward' button then double click on any server to join.
4) Launch the game. In 'Online Option', make sure that LAN mode is selected instead of Internet.
5) Play your game and open up the main menu (Esc), the Game Lobby option should be active now.