[BUG] Critical API bug - Persistent Errors Blocking All Operations

Preflight Checklist

• [x] I have searched existing issues and this hasn't been reported yet
• [x] This is a single bug report (please file separate reports for different bugs)
• [x] I am using the latest version of Claude Code

What's Wrong?

Since yesterday, I have been encountering continuous errors with the API. No matter what task I attempt, even something as simple as saving to a ToDo file, it results in errors. This is making it impossible to work or accomplish anything. As a premium service subscriber, we are paying for a functional service, and it’s critical that this issue is resolved urgently to ensure the service works as expected.
Please investigate and fix this as soon as possible.
Thank you

API Error: Claude Code is unable to respond to this request, which appears
to violate our Usage Policy (https://www.anthropic.com/legal/aup). Please
double press esc to edit your last message or start a new session for Claude
Code to assist with a different task. If you are seeing this refusal
repeatedly, try running /model claude-sonnet-4-20250514 to switch models.

What Should Happen?

TO WORK!

Error Messages/Logs

API Error: Claude Code is unable to respond to this request, which appears 
    to violate our Usage Policy (https://www.anthropic.com/legal/aup). Please 
    double press esc to edit your last message or start a new session for Claude
     Code to assist with a different task. If you are seeing this refusal 
    repeatedly, try running /model claude-sonnet-4-20250514 to switch models.

Steps to Reproduce

Ask to read a file or type hello.

Claude Model

Sonnet (default)

Is this a regression?

Yes, this worked in a previous version

Last Working Version

_No response_

Claude Code Version

2.0.27 (Claude Code)

Platform

Anthropic API

Operating System

Other Linux

Terminal/Shell

Xterm

Additional Information

_No response_