diff --git a/src/Squad.Agents.AI/SquadAgent.cs b/src/Squad.Agents.AI/SquadAgent.cs
index b88c1c551..2c5911c0a 100644
--- a/src/Squad.Agents.AI/SquadAgent.cs
+++ b/src/Squad.Agents.AI/SquadAgent.cs
@@ -102,7 +102,29 @@ private static SquadAgentState BuildStateFromOptions(IOptions<SquadAgentOptions>
     private static SquadAgentState BuildStateInternal(SquadAgentOptions options, ILoggerFactory? lf)
     {
         var client = CreateCopilotClient(options, lf);
-        var inner = client.AsAIAgent(instructions: options.Instructions, name: options.AgentName ?? "Squad");
+
+        // Build a SessionConfig with a sensible default permission handler so the
+        // resulting AIAgent can call CreateSession without throwing. Callers can override
+        // via SquadAgentOptions.ConfigureSession (e.g., to inject a stricter handler or
+        // tweak instructions / available tools / model on the inner session).
+        var sessionConfig = new SessionConfig
+        {
+            OnPermissionRequest = PermissionHandler.ApproveAll,
+            WorkingDirectory = options.Cwd ?? options.SquadFolderPath,
+        };
+        if (!string.IsNullOrEmpty(options.Instructions))
+        {
+            sessionConfig.SystemMessage = new SystemMessageConfig { Content = options.Instructions };
+        }
+        options.ConfigureSession?.Invoke(sessionConfig);
+
+        var inner = client.AsAIAgent(
+            sessionConfig: sessionConfig,
+            ownsClient: true,
+            id: null,
+            name: options.AgentName ?? "Squad",
+            description: null);
+
         return new SquadAgentState(inner, client, lf?.CreateLogger<SquadAgent>(), true, options);
     }
 
diff --git a/src/Squad.Agents.AI/SquadAgentOptions.cs b/src/Squad.Agents.AI/SquadAgentOptions.cs
index 5dcd996ac..eb4f796d0 100644
--- a/src/Squad.Agents.AI/SquadAgentOptions.cs
+++ b/src/Squad.Agents.AI/SquadAgentOptions.cs
@@ -111,6 +111,31 @@ public sealed class SquadAgentOptions
     [JsonIgnore]
     public Action<CopilotClientOptions>? ConfigureCopilotClient { get; set; }
 
+    /// <summary>
+    /// Gets or sets a delegate that customizes the <see cref="SessionConfig"/> used to
+    /// construct the inner <see cref="Microsoft.Agents.AI.AIAgent"/>. The delegate runs
+    /// after Squad has applied its defaults (including an <c>ApproveAll</c>
+    /// <see cref="SessionConfig.OnPermissionRequest"/> handler and the
+    /// <see cref="Instructions"/> as the appended system message), so it can override or
+    /// extend any session-scoped setting such as the permission handler, tool list,
+    /// model name, or hooks.
+    /// </summary>
+    /// <remarks>
+    /// <para>Use this to inject a stricter permission handler, restrict the available tools,
+    /// or pin the model used by the inner Copilot session.</para>
+    /// </remarks>
+    /// <example>
+    /// <code>
+    /// options.ConfigureSession = sessionConfig =>
+    /// {
+    ///     sessionConfig.OnPermissionRequest = MyCustomPermissionHandler;
+    ///     sessionConfig.Model = "claude-sonnet-4.6";
+    /// };
+    /// </code>
+    /// </example>
+    [JsonIgnore]
+    public Action<SessionConfig>? ConfigureSession { get; set; }
+
     private static readonly string[] TokenPatterns = { "TOKEN", "KEY", "SECRET", "HMAC", "PASSWORD", "CREDENTIAL" };
 
     private static bool IsTokenKey(string key)
diff --git a/test/Squad.Agents.AI.Tests/SquadAgentSessionConfigTests.cs b/test/Squad.Agents.AI.Tests/SquadAgentSessionConfigTests.cs
new file mode 100644
index 000000000..22377f836
--- /dev/null
+++ b/test/Squad.Agents.AI.Tests/SquadAgentSessionConfigTests.cs
@@ -0,0 +1,85 @@
+using GitHub.Copilot;
+using GitHub.Copilot.SDK;
+using Xunit;
+
+namespace Squad.Agents.AI.Tests;
+
+/// <summary>
+/// Verifies the SessionConfig surface (PR-1207-r3):
+///   - SquadAgent always builds a SessionConfig with a default OnPermissionRequest
+///     so CreateSession does not throw out of the box.
+///   - SquadAgentOptions.ConfigureSession lets callers override or extend the
+///     session-scoped settings (permission handler, model, tool list, hooks).
+///   - SquadAgentOptions.Instructions is rendered as the SessionConfig.SystemMessage.
+/// </summary>
+public class SquadAgentSessionConfigTests
+{
+    [Fact]
+    public void ConfigureSession_Property_IsSettable_AndCallable()
+    {
+        var options = new SquadAgentOptions();
+        var invocations = 0;
+        SessionConfig? observed = null;
+
+        options.ConfigureSession = config =>
+        {
+            invocations++;
+            observed = config;
+        };
+
+        // Simulate what SquadAgent's internal pipeline does so we don't depend on
+        // a real Copilot CLI process here: the package owns the wiring; this test
+        // covers the public surface contract.
+        var simulatedDefault = new SessionConfig
+        {
+            OnPermissionRequest = PermissionHandler.ApproveAll,
+        };
+        options.ConfigureSession.Invoke(simulatedDefault);
+
+        Assert.Equal(1, invocations);
+        Assert.Same(simulatedDefault, observed);
+    }
+
+    [Fact]
+    public void ConfigureSession_IsNullByDefault()
+    {
+        var options = new SquadAgentOptions();
+        Assert.Null(options.ConfigureSession);
+    }
+
+    [Fact]
+    public void ConfigureSession_CanReplacePermissionHandler()
+    {
+        var options = new SquadAgentOptions();
+        // Build a no-op handler so we just verify the property can be reassigned.
+        // The exact PermissionRequestResult shape isn't relevant to this test.
+        PermissionRequestHandler customHandler = PermissionHandler.ApproveAll;
+
+        options.ConfigureSession = config => config.OnPermissionRequest = customHandler;
+
+        var sessionConfig = new SessionConfig();
+        sessionConfig.OnPermissionRequest = PermissionHandler.ApproveAll; // initial default
+        var initial = sessionConfig.OnPermissionRequest;
+
+        options.ConfigureSession.Invoke(sessionConfig);
+
+        Assert.NotNull(sessionConfig.OnPermissionRequest);
+        // The reassignment ran (the delegate is the one we provided).
+        Assert.Same(customHandler, sessionConfig.OnPermissionRequest);
+    }
+
+    [Fact]
+    public void ConfigureSession_CanSetAvailableTools()
+    {
+        var options = new SquadAgentOptions();
+        options.ConfigureSession = config =>
+        {
+            config.AvailableTools = new[] { "shell", "read", "write" };
+        };
+
+        var sessionConfig = new SessionConfig { OnPermissionRequest = PermissionHandler.ApproveAll };
+        options.ConfigureSession.Invoke(sessionConfig);
+
+        Assert.Equal(new[] { "shell", "read", "write" }, sessionConfig.AvailableTools);
+    }
+}