[BUG] Environment variables defined in Local Settings are ignored if any Environment Variables are defined in Managed Settings

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 a managed settings file defined with an env block, such as below:

{
    "env": {
        "CLAUDE_CODE_ENABLE_TELEMETRY": "1",
        "OTEL_EXPORTER_OTLP_PROTOCOL": "http/json",
        "OTEL_LOGS_EXPORTER": "otlp",
        "OTEL_METRICS_EXPORTER": "otlp",
        "OTEL_METRIC_EXPORT_INTERVAL": "60000",
        "CLAUDE_CODE_USE_BEDROCK": "1",
        "AWS_PROFILE": "bedrock",
        "ANTHROPIC_DEFAULT_SONNET_MODEL": "us.anthropic.claude-sonnet-4-6"
    }
}

if I then have a local settings file with an env block, such as below:

  "env": {
    "OTEL_RESOURCE_ATTRIBUTES": "user.email=<my email>,user.name=Matthew"
  },

any environment variables defined in the local settings file are ignored. Effectively, the env blocks do not merge.

What Should Happen?

Keys in the managed settings file should take precedent. But if there are nested keys in the env block, then so long as the nested key doesn't exist in the managed settings block, it should be respected and used.

Error Messages/Logs

Steps to Reproduce

1. Create a managed settings file at /Library/Application\ Support/ClaudeCode/managed-settings.json with the following block:

{
    "env": {
        "CLAUDE_CODE_ENABLE_TELEMETRY": "1",
        "OTEL_EXPORTER_OTLP_PROTOCOL": "http/json",
        "OTEL_LOGS_EXPORTER": "otlp",
        "OTEL_METRICS_EXPORTER": "otlp",
        "OTEL_METRIC_EXPORT_INTERVAL": "60000",
        "CLAUDE_CODE_USE_BEDROCK": "1",
        "AWS_PROFILE": "bedrock",
        "ANTHROPIC_DEFAULT_SONNET_MODEL": "us.anthropic.claude-sonnet-4-6"
    }
}

1. In your local settings file, add the following env block:

{
    "env": {
        "ANTHROPIC_DEFAULT_HAIKU_MODEL": "us.anthropic.claude-haiku-4-5-20251001-v1:0"
    }
}

1. Restart Claude.
2. The default haiku model defined in your local settings file will not be respected.

Claude Model

Not sure / Multiple models

Is this a regression?

Yes, this worked in a previous version

Last Working Version

_No response_

Claude Code Version

2.1.145

Platform

AWS Bedrock

Operating System

macOS

Terminal/Shell

Warp

Additional Information

_No response_