[BUG] VS Code extension prompts to relaunch terminal after update

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?

After updating the Claude Code plugin in Visual Studio Code, any open integrated terminal shows a yellow exclamation icon. The message says the extension wants to relaunch the terminal. This happens while I have processes running in the terminal, and I don't want to restart it because I would lose those processes. The warning icon stays in the status bar and is very annoying, even after dismissing it, and there is no clear way to keep working without relaunching.

This problem appears consistently after updating the extension and makes it hard to use the extension when working with long-running terminal sessions.

What Should Happen?

The extension should not require relaunching existing integrated terminals when it updates. Updates should be applied silently or deferred until the user closes the terminal willingly. Any notification about a needed relaunch should be dismissible, and the yellow exclamation icon should go away once dismissed, so that running processes are not interrupted.

Error Messages/Logs

Steps to Reproduce

1. Open Visual Studio Code with the Claude Code extension installed.
2. Launch an integrated terminal and start a long-running process (e.g., run a server or script).
3. Update the Claude Code extension to the latest version through the Extensions panel or when prompted.
4. After the update finishes, observe that a yellow exclamation icon appears on the existing terminal tab along with a message asking to relaunch the terminal.
5. The prompt persists and cannot be dismissed, forcing you to relaunch the terminal, which would interrupt any running processes.

Claude Model

None

Is this a regression?

No, this never worked

Last Working Version

_No response_

Claude Code Version

2.0.33

Platform

Anthropic API

Operating System

macOS

Terminal/Shell

VS Code integrated terminal

Additional Information

_No response_