[BUG] VS Code extension ignoring project docs, not reading CLAUDE.md, not following conventions

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?

VS Code extension ignoring project docs, not reading CLAUDE.md, not following conventions. Also, not using the Dangerously Skip Permissions setting in VS Code

What Should Happen?

It should follow the same behavior as the terminal sessions by reading the CLAUDE.md on startup, not following conventions. Also, use the VS Code plugin, "Dangerously Skip Permissions."

Error Messages/Logs

Steps to Reproduce

Open the plugin with CLAUDE.md file. It doesn't read it.

Claude Model

None

Is this a regression?

Yes, this worked in a previous version

Last Working Version

_No response_

Claude Code Version

2.1.69

Platform

Anthropic API

Operating System

macOS

Terminal/Shell

Terminal.app (macOS)

Additional Information

_No response_