Nested .claude/settings.local.json shadows parent settings without warning

Description

When Claude Code creates a .claude/settings.local.json file in a nested project directory (e.g., when the user selects "Yes, and don't ask again" for a Bash command), it completely shadows any parent-level settings files. This can cause confusion when permissions that were working suddenly stop working.

Steps to Reproduce

1. Create a repo-level .claude/settings.local.json with permissions:

``json
{
"permissions": {
"allow": [
"Bash(npm test:*)",
"Bash(git add:*)"
]
}
}
``

1. Navigate to a nested project directory (e.g., repo/packages/frontend/)

1. Run a command that triggers a permission prompt

1. Select "Yes, and don't ask again"

1. Claude Code creates repo/packages/frontend/.claude/settings.local.json with just that one permission

1. All the parent-level permissions are now shadowed and no longer work in that directory

Expected Behavior

One or more of:

• Inheritance: Nested settings files should inherit from parent .claude directories
• Prompt: Ask which settings file to add the permission to (project-level vs parent)
• Warning: At minimum, warn the user when creating a file that will shadow a parent settings file
• Merge: Automatically include parent permissions when creating a nested settings file

Current Workaround

Manually merge permissions from the repo-level settings into the nested project settings, or delete the nested settings file and add permissions to the parent instead.

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This issue was written by Claude (claude-code) at the request of a user who encountered this behavior.