diff --git a/internal/cloud/code-agent-agentrun-adapter.ts b/internal/cloud/code-agent-agentrun-adapter.ts
index fa8a1198..f048039e 100644
--- a/internal/cloud/code-agent-agentrun-adapter.ts
+++ b/internal/cloud/code-agent-agentrun-adapter.ts
@@ -297,7 +297,8 @@ export async function submitAgentRunChatTurn({ params = {}, options = {}, traceI
         traceId,
         backendProfile,
         runId: reusable.mapping.runId,
-        stage: "command-create-reused"
+        stage: "command-create-reused",
+        terminalOnFailure: false
       });
       const commandId = requiredString(command?.id, "command.id");
       traceStore.append(traceId, agentRunTraceEvent({
@@ -324,7 +325,8 @@ export async function submitAgentRunChatTurn({ params = {}, options = {}, traceI
           backendProfile,
           runId: reusable.mapping.runId,
           commandId,
-          stage: "runner-job-ensure-reused"
+          stage: "runner-job-ensure-reused",
+          terminalOnFailure: false
         });
       } catch (error) {
         if (!isAgentRunCommandAlreadyClaimed(error)) throw error;
@@ -488,7 +490,7 @@ export async function submitAgentRunChatTurn({ params = {}, options = {}, traceI
   return decorateAgentRunRunningResult({ base: initialAgentRunChatResult({ params: finalDispatchParams, options, traceId }), mapping, traceStore, traceId });
 }
 
-async function agentRunDispatchJson({ fetchImpl, managerUrl, path, method = "GET", body = undefined, timeoutMs, env = process.env, traceStore = defaultCodeAgentTraceStore, traceId, backendProfile, runId = null, commandId = null, stage = "agentrun-dispatch" } = {}) {
+async function agentRunDispatchJson({ fetchImpl, managerUrl, path, method = "GET", body = undefined, timeoutMs, env = process.env, traceStore = defaultCodeAgentTraceStore, traceId, backendProfile, runId = null, commandId = null, stage = "agentrun-dispatch", terminalOnFailure = true } = {}) {
   const policy = agentRunDispatchRetryPolicy(env);
   let retryAttempt = 0;
   for (;;) {
@@ -501,7 +503,7 @@ async function agentRunDispatchJson({ fetchImpl, managerUrl, path, method = "GET
         traceStore.append(traceId, agentRunTraceEvent({
           type: "error",
           eventType: "error",
-          status: "failed",
+          status: terminalOnFailure ? "failed" : "blocked",
           label: retryable ? `agentrun:dispatch-retry-exhausted:${failureKind}` : `agentrun:dispatch-failed:${failureKind}`,
           errorCode: failureKind,
           failureKind,
@@ -512,11 +514,11 @@ async function agentRunDispatchJson({ fetchImpl, managerUrl, path, method = "GET
           retryExhausted: retryable && retryAttempt >= policy.maxRetries,
           runId,
           commandId,
-          waitingFor: "agentrun-dispatch-failed",
+          waitingFor: terminalOnFailure ? "agentrun-dispatch-failed" : "agentrun-dispatch-recovery",
           message: retryable
-            ? `AgentRun dispatch transient ${failureKind}; retry ${retryAttempt}/${policy.maxRetries} exhausted at stage ${stage}. Code Agent stopped this turn.`
-            : `AgentRun dispatch failed with non-retryable ${failureKind} at stage ${stage}. Code Agent stopped this turn.`,
-          terminal: true,
+            ? `AgentRun dispatch transient ${failureKind}; retry ${retryAttempt}/${policy.maxRetries} exhausted at stage ${stage}. ${terminalOnFailure ? "Code Agent stopped this turn." : "HWLAB will continue with the next recovery path for this turn."}`
+            : `AgentRun dispatch failed with non-retryable ${failureKind} at stage ${stage}. ${terminalOnFailure ? "Code Agent stopped this turn." : "HWLAB will continue with the next recovery path for this turn."}`,
+          terminal: terminalOnFailure,
           valuesPrinted: false
         }, backendProfile));
         throw Object.assign(error, { retryAttempt, retryMax: policy.maxRetries, failureKind, retryExhausted: retryable && retryAttempt >= policy.maxRetries });