diff --git a/packages/jupyter-ai/jupyter_ai/completions/handlers/base.py b/packages/jupyter-ai/jupyter_ai/completions/handlers/base.py
index 5d2e16e1c..cf07550bc 100644
--- a/packages/jupyter-ai/jupyter_ai/completions/handlers/base.py
+++ b/packages/jupyter-ai/jupyter_ai/completions/handlers/base.py
@@ -129,9 +129,10 @@ async def handle_exc(self, e: Exception, request: InlineCompletionRequest):
         `handle_stream_request()`. This base class provides a default
         implementation, which may be overridden by subclasses.
         """
+        title = e.args[0] if e.args else "Exception"
         error = CompletionError(
             type=e.__class__.__name__,
-            title=e.args[0] if e.args else "Exception",
+            title=title,
             traceback=traceback.format_exc(),
         )
         self.reply(
diff --git a/packages/jupyter-ai/jupyter_ai/tests/completions/test_handlers.py b/packages/jupyter-ai/jupyter_ai/tests/completions/test_handlers.py
index c043fd8a5..b3d00159e 100644
--- a/packages/jupyter-ai/jupyter_ai/tests/completions/test_handlers.py
+++ b/packages/jupyter-ai/jupyter_ai/tests/completions/test_handlers.py
@@ -21,15 +21,22 @@ class MockProvider(BaseProvider, FakeListLLM):
     name = "My Provider"
     model_id_key = "model"
     models = ["model"]
+    raise_exc: bool = False
 
     def __init__(self, **kwargs):
         if "responses" not in kwargs:
             kwargs["responses"] = ["Test response"]
         super().__init__(**kwargs)
 
+    async def _acall(self, *args, **kwargs):
+        if self.raise_exc:
+            raise Exception("Test exception")
+        else:
+            return super()._call(*args, **kwargs)
+
 
 class MockCompletionHandler(DefaultInlineCompletionHandler):
-    def __init__(self, lm_provider=None, lm_provider_params=None):
+    def __init__(self, lm_provider=None, lm_provider_params=None, raise_exc=False):
         self.request = HTTPServerRequest()
         self.application = Application()
         self.messages = []
@@ -50,10 +57,6 @@ def reply(
     ) -> None:
         self.messages.append(message)
 
-    async def handle_exc(self, e: Exception, _request: InlineCompletionRequest):
-        # raise all exceptions during testing rather
-        raise e
-
 
 @fixture
 def inline_handler() -> MockCompletionHandler:
@@ -191,3 +194,21 @@ async def test_handle_stream_request():
     assert third.type == "stream"
     assert third.response.insertText == "test"
     assert third.done is True
+
+
+async def test_handle_request_with_error(inline_handler):
+    inline_handler = MockCompletionHandler(
+        lm_provider=MockProvider,
+        lm_provider_params={
+            "model_id": "model",
+            "responses": ["test"],
+            "raise_exc": True,
+        },
+    )
+    dummy_request = InlineCompletionRequest(
+        number=1, prefix="", suffix="", mime="", stream=True
+    )
+    await inline_handler.on_message(json.dumps(dict(dummy_request)))
+    await inline_handler.tasks[0]
+    error = inline_handler.messages[-1].model_dump().get("error", None)
+    assert error is not None
diff --git a/packages/jupyter-ai/src/completions/provider.ts b/packages/jupyter-ai/src/completions/provider.ts
index 80c199f5a..f4d959cb7 100644
--- a/packages/jupyter-ai/src/completions/provider.ts
+++ b/packages/jupyter-ai/src/completions/provider.ts
@@ -122,15 +122,19 @@ export class JaiInlineProvider
             label: 'Show Traceback',
             callback: () => {
               showErrorMessage('Inline completion failed on the server side', {
-                message: error.traceback
+                message: `${error.title}\n${error.traceback}`
               });
             }
           }
         ]
       });
-      throw new Error(
-        `Inline completion failed: ${error.type}\n${error.traceback}`
-      );
+      const items = [
+        {
+          error: { message: error.title },
+          insertText: ''
+        }
+      ];
+      return { items };
     }
     return result.list;
   }
diff --git a/packages/jupyter-ai/src/completions/types.ts b/packages/jupyter-ai/src/completions/types.ts
index 13dad9c8e..f491e5079 100644
--- a/packages/jupyter-ai/src/completions/types.ts
+++ b/packages/jupyter-ai/src/completions/types.ts
@@ -35,6 +35,7 @@ export namespace AiCompleterService {
   export type CompletionError = {
     type: string;
     traceback: string;
+    title: string;
   };
 
   export type InlineCompletionReply = {