diff --git a/server/src/agents/pool/auto_assign/watchdog/mod.rs b/server/src/agents/pool/auto_assign/watchdog/mod.rs
index 7376fbda..e4ee0e71 100644
--- a/server/src/agents/pool/auto_assign/watchdog/mod.rs
+++ b/server/src/agents/pool/auto_assign/watchdog/mod.rs
@@ -4,9 +4,11 @@
 mod budget;
 mod limits;
 mod orphan;
+mod reap;
 #[cfg(test)]
 mod tests;
 
+use std::collections::HashSet;
 use std::path::Path;
 
 use crate::agents::AgentStatus;
@@ -18,6 +20,7 @@ use crate::slog_warn;
 use super::super::AgentPool;
 use limits::check_agent_limits;
 use orphan::check_orphaned_agents;
+use reap::reap_failed_agents;
 
 pub(crate) use budget::{compute_budget_from_logs, compute_budget_from_single_log};
 pub(crate) use limits::{count_turns_in_log, resolve_session_log};
@@ -45,7 +48,9 @@ impl AgentPool {
         if let Some(root) = project_root {
             let terminated = check_agent_limits(&self.agents, root).await;
             let config = ProjectConfig::load(root).unwrap_or_default();
+            let mut just_terminated: HashSet<String> = HashSet::new();
             for (key, reason) in &terminated {
+                just_terminated.insert(key.clone());
                 // Step 1: snapshot the agent's worktree path so we can find every
                 // process running in it (claude + any subprocesses).  This must
                 // happen BEFORE we mutate the agent record so we can read the
@@ -132,7 +137,16 @@ impl AgentPool {
             if !terminated.is_empty() {
                 Self::notify_agent_state_changed(&self.watcher_tx);
             }
-            return orphaned + terminated.len();
+
+            // Bug 1198: reap any other Failed pool entry with no live process
+            // — orphan-detected above, or left behind by a spawn error
+            // (inactivity-watchdog kill, worktree timeout, runtime error)
+            // that never routed through the retry/respawn path. Entries the
+            // limits loop above just processed are excluded so their retry
+            // count isn't bumped twice.
+            let reaped = reap_failed_agents(self, root, &config, &just_terminated).await;
+
+            return orphaned + terminated.len() + reaped;
         }
 
         orphaned
diff --git a/server/src/agents/pool/auto_assign/watchdog/reap.rs b/server/src/agents/pool/auto_assign/watchdog/reap.rs
new file mode 100644
index 00000000..dce88bc8
--- /dev/null
+++ b/server/src/agents/pool/auto_assign/watchdog/reap.rs
@@ -0,0 +1,99 @@
+//! Reap: removes stale `Failed` pool entries left behind by orphan detection,
+//! watchdog kills, or internal spawn failures, and respawns the story's agent
+//! (or blocks the story once its retry budget is exhausted).
+//!
+//! `check_orphaned_agents` only scans `Running`/`Pending` entries, so once an
+//! entry is marked `Failed` it becomes invisible to every later watchdog
+//! pass. Without this step a `Failed` entry with no live process sits in the
+//! pool forever: `list_agents` keeps showing it, and the story never gets a
+//! new agent unless some unrelated CRDT transition happens to trigger a
+//! system-wide auto-assign scan.
+
+use std::collections::HashSet;
+use std::path::Path;
+
+use crate::agents::AgentStatus;
+use crate::agents::pool::AgentPool;
+use crate::agents::pool::pipeline::should_block_story;
+use crate::config::ProjectConfig;
+use crate::io::watcher::WatcherEvent;
+use crate::{slog, slog_warn};
+
+/// Reap every `Failed` pool entry with no live process, except keys in
+/// `exclude_keys` (already handled by the caller's own retry/block logic in
+/// this same pass — e.g. limit-exceeded kills).
+///
+/// For each reaped entry: removes it from the pool (so `list_agents` stops
+/// showing it), increments the story's retry count via [`should_block_story`]
+/// and, unless that blocks the story, respawns the agent by name.
+/// `start_agent`'s own session-store lookup resumes the prior session
+/// automatically whenever one was recorded — no explicit session plumbing
+/// needed here.
+pub(super) async fn reap_failed_agents(
+    pool: &AgentPool,
+    project_root: &Path,
+    config: &ProjectConfig,
+    exclude_keys: &HashSet<String>,
+) -> usize {
+    let dead: Vec<(String, String, String)> = {
+        let mut agents = pool.agents.lock().await;
+        let keys: Vec<String> = agents
+            .iter()
+            .filter(|(key, agent)| {
+                agent.status == AgentStatus::Failed
+                    && !exclude_keys.contains(*key)
+                    && agent
+                        .task_handle
+                        .as_ref()
+                        .map(|h| h.is_finished())
+                        .unwrap_or(true)
+            })
+            .map(|(key, _)| key.clone())
+            .collect();
+        keys.into_iter()
+            .filter_map(|key| {
+                agents.remove(&key).map(|agent| {
+                    let story_id = key
+                        .rsplit_once(':')
+                        .map(|(s, _)| s.to_string())
+                        .unwrap_or_else(|| key.clone());
+                    (key, story_id, agent.agent_name)
+                })
+            })
+            .collect()
+    };
+
+    let count = dead.len();
+    for (key, story_id, agent_name) in dead {
+        if let Some(block_reason) = should_block_story(&story_id, config.max_retries, "watchdog") {
+            let _ = pool.watcher_tx.send(WatcherEvent::StoryBlocked {
+                story_id: story_id.clone(),
+                reason: block_reason,
+            });
+            slog!(
+                "[watchdog] Story '{story_id}' blocked after exceeding retry limit \
+                 (reaped dead pool entry '{key}')."
+            );
+            continue;
+        }
+
+        slog!(
+            "[watchdog] Reaping dead pool entry '{key}'; respawning '{agent_name}' \
+             for '{story_id}'."
+        );
+        if let Err(e) = pool
+            .start_agent(project_root, &story_id, Some(&agent_name), None, None)
+            .await
+        {
+            slog_warn!(
+                "[watchdog] Failed to respawn '{agent_name}' for '{story_id}' after reap: {e}"
+            );
+        }
+    }
+
+    if count > 0 {
+        AgentPool::notify_agent_state_changed(&pool.watcher_tx);
+    }
+
+    count
+}
diff --git a/server/src/agents/pool/auto_assign/watchdog/tests/mod.rs b/server/src/agents/pool/auto_assign/watchdog/tests/mod.rs
index 326c2127..73e6066a 100644
--- a/server/src/agents/pool/auto_assign/watchdog/tests/mod.rs
+++ b/server/src/agents/pool/auto_assign/watchdog/tests/mod.rs
@@ -4,6 +4,7 @@ use std::path::Path;
 
 mod limits_tests;
 mod orphan_tests;
+mod reap_tests;
 
 /// Write a fake session log file with `n` tool-using assistant turn entries.
 ///
diff --git a/server/src/agents/pool/auto_assign/watchdog/tests/reap_tests.rs b/server/src/agents/pool/auto_assign/watchdog/tests/reap_tests.rs
new file mode 100644
index 00000000..39f6242a
--- /dev/null
+++ b/server/src/agents/pool/auto_assign/watchdog/tests/reap_tests.rs
@@ -0,0 +1,238 @@
+//! Regression tests for the reap pass (bug 1198): a Failed pool entry with
+//! no live process must be respawned by the next watchdog pass, with its
+//! story's retry count bumped, and must stop appearing in list_agents.
+
+use super::super::super::super::{AgentPool, composite_key};
+use super::{write_fake_session_log, write_project_config};
+use crate::agents::AgentStatus;
+
+/// AC1 + AC4: a Failed entry with no live process (simulating e.g. the
+/// inactivity watchdog kill landing in spawn.rs's generic Err arm) is
+/// respawned by the very next `run_watchdog_pass` — no manual
+/// stop_agent/start_agent needed.
+#[tokio::test]
+async fn reap_respawns_stale_failed_agent() {
+    crate::db::ensure_content_store();
+    crate::crdt_state::init_for_test();
+
+    let tmp = tempfile::tempdir().unwrap();
+    let root = tmp.path();
+
+    write_project_config(
+        root,
+        r#"
+[[agent]]
+name = "coder-1"
+runtime = "claude-code"
+"#,
+    );
+
+    let story_id = "1198_story_stuck";
+    crate::db::write_content(
+        crate::db::ContentKey::Story(story_id),
+        "---\nname: Stuck Story\n---\n",
+    );
+    crate::crdt_state::write_item_str(story_id, "2_current", Some("Stuck Story"), None, None, None);
+
+    // Inject a Failed entry with no task_handle — exactly what spawn.rs's
+    // generic Err arm leaves behind after e.g. an inactivity-watchdog kill.
+    let pool = AgentPool::new_test(3001);
+    pool.inject_test_agent(story_id, "coder-1", AgentStatus::Failed);
+
+    let found = pool.run_watchdog_pass(Some(root)).await;
+    assert!(found >= 1, "reap should count the stale Failed entry");
+
+    // A fresh entry must exist for the same story — the agent respawned.
+    let agents = pool.agents.try_lock().unwrap();
+    let key = composite_key(story_id, "coder-1");
+    let agent = agents.get(&key).expect("agent must have been respawned");
+    assert_ne!(
+        agent.status,
+        AgentStatus::Failed,
+        "respawned entry must not still be Failed"
+    );
+}
+
+/// AC2: reaping a stale Failed entry bumps the story's retry count via the
+/// existing should_block_story path.
+#[tokio::test]
+async fn reap_increments_retry_count() {
+    crate::db::ensure_content_store();
+    crate::crdt_state::init_for_test();
+
+    let tmp = tempfile::tempdir().unwrap();
+    let root = tmp.path();
+
+    write_project_config(
+        root,
+        r#"
+max_retries = 5
+
+[[agent]]
+name = "coder-1"
+runtime = "claude-code"
+"#,
+    );
+
+    let story_id = "1198_story_retry";
+    crate::db::write_content(
+        crate::db::ContentKey::Story(story_id),
+        "---\nname: Retry Story\n---\n",
+    );
+    crate::crdt_state::write_item_str(story_id, "2_current", Some("Retry Story"), None, None, None);
+
+    let pool = AgentPool::new_test(3001);
+    pool.inject_test_agent(story_id, "coder-1", AgentStatus::Failed);
+
+    pool.run_watchdog_pass(Some(root)).await;
+
+    let item = crate::crdt_state::read_item(story_id).expect("story must be in CRDT");
+    assert_eq!(
+        item.retry_count(),
+        1,
+        "reaping a stale Failed entry must bump retry_count exactly once"
+    );
+}
+
+/// AC2: exhausting max_retries via a reap blocks the story via the existing
+/// should_block_story path (same mechanism as the limits watchdog).
+#[tokio::test]
+async fn reap_blocks_story_after_max_retries() {
+    crate::db::ensure_content_store();
+    crate::crdt_state::init_for_test();
+
+    let tmp = tempfile::tempdir().unwrap();
+    let root = tmp.path();
+
+    write_project_config(
+        root,
+        r#"
+max_retries = 1
+
+[[agent]]
+name = "coder-1"
+runtime = "claude-code"
+"#,
+    );
+
+    let story_id = "1198_story_block";
+    crate::db::write_content(
+        crate::db::ContentKey::Story(story_id),
+        "---\nname: Block Story\n---\n",
+    );
+    crate::crdt_state::write_item_str(story_id, "2_current", Some("Block Story"), None, None, None);
+
+    let pool = AgentPool::new_test(3001);
+    pool.inject_test_agent(story_id, "coder-1", AgentStatus::Failed);
+
+    pool.run_watchdog_pass(Some(root)).await;
+
+    let item = crate::crdt_state::read_item(story_id).expect("story must be in CRDT");
+    assert_eq!(
+        item.stage().dir_name(),
+        "blocked",
+        "story must be blocked after exhausting max_retries=1 via reap"
+    );
+}
+
+/// AC3: list_agents never shows a Failed entry after the next watchdog pass
+/// reaps it — regardless of whether the story blocks or respawns.
+#[tokio::test]
+async fn reap_removes_failed_entry_from_list_agents() {
+    crate::db::ensure_content_store();
+    crate::crdt_state::init_for_test();
+
+    let tmp = tempfile::tempdir().unwrap();
+    let root = tmp.path();
+
+    write_project_config(
+        root,
+        r#"
+max_retries = 1
+
+[[agent]]
+name = "coder-1"
+runtime = "claude-code"
+"#,
+    );
+
+    let story_id = "1198_story_listing";
+    crate::db::write_content(
+        crate::db::ContentKey::Story(story_id),
+        "---\nname: Listing Story\n---\n",
+    );
+    crate::crdt_state::write_item_str(
+        story_id,
+        "2_current",
+        Some("Listing Story"),
+        None,
+        None,
+        None,
+    );
+
+    let pool = AgentPool::new_test(3001);
+    pool.inject_test_agent(story_id, "coder-1", AgentStatus::Failed);
+
+    pool.run_watchdog_pass(Some(root)).await;
+
+    let listed = pool.list_agents().await.unwrap();
+    assert!(
+        !listed
+            .iter()
+            .any(|a| a.story_id == story_id && a.status == AgentStatus::Failed),
+        "list_agents must not show a Failed entry for '{story_id}' after the next watchdog pass"
+    );
+}
+
+/// The limits-termination path (turn/budget overrun) must not have its
+/// retry_count double-bumped by the reap pass running in the same
+/// `run_watchdog_pass` call.
+#[tokio::test]
+async fn reap_does_not_double_bump_limits_terminated_agent() {
+    crate::db::ensure_content_store();
+    crate::crdt_state::init_for_test();
+
+    let tmp = tempfile::tempdir().unwrap();
+    let root = tmp.path();
+
+    write_project_config(
+        root,
+        r#"
+max_retries = 5
+
+[[agent]]
+name = "coder-1"
+runtime = "claude-code"
+max_turns = 10
+"#,
+    );
+
+    let story_id = "1198_story_no_double_bump";
+    crate::db::write_content(
+        crate::db::ContentKey::Story(story_id),
+        "---\nname: No Double Bump\n---\n",
+    );
+    crate::crdt_state::write_item_str(
+        story_id,
+        "2_current",
+        Some("No Double Bump"),
+        None,
+        None,
+        None,
+    );
+
+    write_fake_session_log(root, story_id, "coder-1", "sess-overrun", 12);
+
+    let pool = AgentPool::new_test(3001);
+    pool.inject_test_agent_with_session(story_id, "coder-1", AgentStatus::Running, "sess-overrun");
+
+    pool.run_watchdog_pass(Some(root)).await;
+
+    let item = crate::crdt_state::read_item(story_id).expect("story must be in CRDT");
+    assert_eq!(
+        item.retry_count(),
+        1,
+        "a single limit-termination pass must bump retry_count by exactly 1, \
+         not twice (once from the limits branch, once from reap)"
+    );
+}