diff --git a/src/App.stories.tsx b/src/App.stories.tsx
index 9cfcdce36..db7d01b8b 100644
--- a/src/App.stories.tsx
+++ b/src/App.stories.tsx
@@ -618,6 +618,88 @@ export const ActiveWorkspaceWithChat: Story = {
                     },
                   });
 
+                  // User asking to test error handling
+                  callback({
+                    id: "msg-10",
+                    role: "user",
+                    parts: [
+                      {
+                        type: "text",
+                        text: "Can you show me some examples of error handling?",
+                      },
+                    ],
+                    metadata: {
+                      historySequence: 10,
+                      timestamp: STABLE_TIMESTAMP - 160000,
+                    },
+                  });
+
+                  // Assistant response with various tool errors
+                  callback({
+                    id: "msg-11",
+                    role: "assistant",
+                    parts: [
+                      {
+                        type: "text",
+                        text: "I'll demonstrate various error scenarios:",
+                      },
+                      // Tool error format #1: File read error
+                      {
+                        type: "dynamic-tool",
+                        toolCallId: "call-5",
+                        toolName: "file_read",
+                        state: "output-available",
+                        input: {
+                          filePath: "/nonexistent/file.txt",
+                        },
+                        output: {
+                          success: false,
+                          error: "ENOENT: no such file or directory, open '/nonexistent/file.txt'",
+                        },
+                      },
+                      // Tool error format #2: WRITE DENIED (should be collapsed)
+                      {
+                        type: "dynamic-tool",
+                        toolCallId: "call-6",
+                        toolName: "file_edit_replace_string",
+                        state: "output-available",
+                        input: {
+                          file_path: "src/test.ts",
+                          old_string: "const x = 1;",
+                          new_string: "const x = 2;",
+                        },
+                        output: {
+                          success: false,
+                          error:
+                            "WRITE DENIED, FILE UNMODIFIED: File has been modified since it was read. Please re-read the file and try again.",
+                        },
+                      },
+                      // Tool error format #3: AI SDK error (policy disabled)
+                      {
+                        type: "dynamic-tool",
+                        toolCallId: "call-7",
+                        toolName: "unknown_tool",
+                        state: "output-available",
+                        input: {
+                          someParam: "value",
+                        },
+                        output: {
+                          error:
+                            "Tool 'unknown_tool' is not available. Available tools: bash, file_read, file_edit_replace_string",
+                        },
+                      },
+                      {
+                        type: "text",
+                        text: "As you can see, different error types are displayed with clear indicators and appropriate styling.",
+                      },
+                    ],
+                    metadata: {
+                      historySequence: 11,
+                      timestamp: STABLE_TIMESTAMP - 150000,
+                      model: "claude-sonnet-4-20250514",
+                    },
+                  });
+
                   // Mark as caught up
                   callback({ type: "caught-up" });
                 }, 100);
diff --git a/src/components/tools/FileEditToolCall.tsx b/src/components/tools/FileEditToolCall.tsx
index cfb3d0034..e732beadc 100644
--- a/src/components/tools/FileEditToolCall.tsx
+++ b/src/components/tools/FileEditToolCall.tsx
@@ -103,9 +103,17 @@ export const FileEditToolCall: React.FC<FileEditToolCallProps> = ({
   const isWriteDenied = result && !result.success && result.error?.startsWith(WRITE_DENIED_PREFIX);
   const initialExpanded = !isWriteDenied;
 
-  const { expanded, toggleExpanded } = useToolExpansion(initialExpanded);
+  const { expanded, setExpanded, toggleExpanded } = useToolExpansion(initialExpanded);
   const [showRaw, setShowRaw] = React.useState(false);
 
+  // Update expanded state when result changes from undefined to WRITE DENIED
+  // This handles the case where the component renders before the result is available
+  React.useEffect(() => {
+    if (result && !result.success && result.error?.startsWith(WRITE_DENIED_PREFIX)) {
+      setExpanded(false);
+    }
+  }, [result, setExpanded]);
+
   const filePath = "file_path" in args ? args.file_path : undefined;
 
   // Copy to clipboard with feedback
diff --git a/src/components/tools/GenericToolCall.tsx b/src/components/tools/GenericToolCall.tsx
index bf3831930..f4c3ed4fe 100644
--- a/src/components/tools/GenericToolCall.tsx
+++ b/src/components/tools/GenericToolCall.tsx
@@ -33,6 +33,18 @@ export const GenericToolCall: React.FC<GenericToolCallProps> = ({
 }) => {
   const { expanded, toggleExpanded } = useToolExpansion();
 
+  // Check if result contains an error
+  // Handles two formats:
+  // 1. Tool implementation errors: { success: false, error: "..." }
+  // 2. AI SDK tool-error events: { error: "..." }
+  const hasError =
+    result &&
+    typeof result === "object" &&
+    "error" in result &&
+    typeof result.error === "string" &&
+    result.error.length > 0 &&
+    (!("success" in result) || result.success === false);
+
   const hasDetails = args !== undefined || result !== undefined;
 
   return (
@@ -52,7 +64,16 @@ export const GenericToolCall: React.FC<GenericToolCallProps> = ({
             </DetailSection>
           )}
 
-          {result !== undefined && (
+          {hasError ? (
+            <DetailSection>
+              <DetailLabel>Error</DetailLabel>
+              <div className="text-danger bg-danger-overlay border-danger rounded border-l-2 px-2 py-1.5 text-[11px]">
+                {String((result as { error: string }).error)}
+              </div>
+            </DetailSection>
+          ) : null}
+
+          {result !== undefined && !hasError && (
             <DetailSection>
               <DetailLabel>Result</DetailLabel>
               <DetailContent>{formatValue(result)}</DetailContent>
diff --git a/src/utils/messages/StreamingMessageAggregator.ts b/src/utils/messages/StreamingMessageAggregator.ts
index 1af90a9ac..1ee589721 100644
--- a/src/utils/messages/StreamingMessageAggregator.ts
+++ b/src/utils/messages/StreamingMessageAggregator.ts
@@ -805,9 +805,11 @@ export class StreamingMessageAggregator {
               });
             } else if (isDynamicToolPart(part)) {
               // Determine status based on part state and result
+              // hasFailureResult now checks both error formats:
+              // 1. Tool implementation errors: { success: false, error: "..." }
+              // 2. AI SDK tool-error events: { error: "..." }
               let status: "pending" | "executing" | "completed" | "failed" | "interrupted";
               if (part.state === "output-available") {
-                // Check if result indicates failure (for tools that return { success: boolean })
                 status = hasFailureResult(part.output) ? "failed" : "completed";
               } else if (part.state === "input-available" && message.metadata?.partial) {
                 status = "interrupted";