Yes it's quite ambiguous sometimes. Dāriot can mean Kingdom in dative and locative singular but also Queen in dative singular. I can not imagine the verb to live to take an accusative or dative object so it's quite clear that in this sentence it's the locative and therefore can only be kingdom. And also the context makes it clear. (Well you could say to a baby: "You live in a beautiful queen!" if it is not born yet) :D
For example here is a sentence that would not be clear without context:
Dohaeriros dārio iksan.
In that case, a High Valerian person would think of the Queen and the kingdom as being the same, wouldn't they?