[BUG] Use Terminal setting not always working in VS code extension

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?

When I have Use Terminal set to true, and then I open a new session using the "+ New session" button above the list of sessions in the extension, it opens in the chat view rather than the terminal. Also, opening any of the previous sessions also opens in the chat view rather than terminal. I can still open a new terminal session by clicking the little claude icon on the top right of the welcome page but if I have that page disabled I have to open a New session from the claude extension (which opens in the new chat view) and then click the little icon to open a terminal session.

What Should Happen?

Opening any existing or new session should open in terminal if the Use Terminal setting is set to true.

Error Messages/Logs

Steps to Reproduce

1. Open VScode
2. Open settings and set use terminal to true
3. Click the claude extension on the left menu
4. Click +New session at the top
5. It does not open the session in terminal
6. Open any session from the list.
7. They do not open in terminal.

Claude Model

None

Is this a regression?

Not sure

Last Working Version

_No response_

Claude Code Version

2.1.112

Platform

Anthropic API

Operating System

macOS

Terminal/Shell

VS Code integrated terminal

Additional Information

_No response_