diff --git a/src/utils/__tests__/env-api-key.test.ts b/src/utils/__tests__/env-api-key.test.ts
new file mode 100644
index 00000000..e1ed75d8
--- /dev/null
+++ b/src/utils/__tests__/env-api-key.test.ts
@@ -0,0 +1,58 @@
+import { mkdtempSync, mkdirSync, writeFileSync, rmSync } from 'fs';
+import path from 'path';
+import { tmpdir } from 'os';
+import { readApiKeyFromEnv } from '@utils/env-api-key';
+
+describe('readApiKeyFromEnv', () => {
+  let tmpDir: string;
+  let cwdSpy: jest.SpyInstance;
+
+  beforeEach(() => {
+    tmpDir = mkdtempSync(path.join(tmpdir(), 'wizard-env-test-'));
+    cwdSpy = jest.spyOn(process, 'cwd').mockReturnValue(tmpDir);
+  });
+
+  afterEach(() => {
+    cwdSpy.mockRestore();
+    rmSync(tmpDir, { recursive: true, force: true });
+  });
+
+  it('returns undefined when no env file exists', () => {
+    expect(readApiKeyFromEnv()).toBeUndefined();
+  });
+
+  it('reads the key from .env', () => {
+    writeFileSync(
+      path.join(tmpDir, '.env'),
+      'POSTHOG_PERSONAL_API_KEY=phx_from_env\n',
+    );
+    expect(readApiKeyFromEnv()).toBe('phx_from_env');
+  });
+
+  it('prefers .env.local over .env', () => {
+    writeFileSync(
+      path.join(tmpDir, '.env'),
+      'POSTHOG_PERSONAL_API_KEY=phx_from_env\n',
+    );
+    writeFileSync(
+      path.join(tmpDir, '.env.local'),
+      'POSTHOG_PERSONAL_API_KEY=phx_from_local\n',
+    );
+    expect(readApiKeyFromEnv()).toBe('phx_from_local');
+  });
+
+  it('does not crash when .env is a directory (e.g. a Python virtualenv)', () => {
+    mkdirSync(path.join(tmpDir, '.env'));
+    expect(() => readApiKeyFromEnv()).not.toThrow();
+    expect(readApiKeyFromEnv()).toBeUndefined();
+  });
+
+  it('falls back to .env when .env.local is a directory', () => {
+    mkdirSync(path.join(tmpDir, '.env.local'));
+    writeFileSync(
+      path.join(tmpDir, '.env'),
+      'POSTHOG_PERSONAL_API_KEY=phx_from_env\n',
+    );
+    expect(readApiKeyFromEnv()).toBe('phx_from_env');
+  });
+});
diff --git a/src/utils/env-api-key.ts b/src/utils/env-api-key.ts
index 2eae97dc..5c92f680 100644
--- a/src/utils/env-api-key.ts
+++ b/src/utils/env-api-key.ts
@@ -9,12 +9,19 @@ export function readApiKeyFromEnv(): string | undefined {
   const envFiles = ['.env.local', '.env'];
   for (const envFile of envFiles) {
     const envPath = path.join(process.cwd(), envFile);
-    if (fs.existsSync(envPath)) {
-      const content = fs.readFileSync(envPath, 'utf8');
-      const match = content.match(/^POSTHOG_PERSONAL_API_KEY=(.+)$/m);
-      if (match) {
-        return match[1].trim();
-      }
+    let content: string;
+    try {
+      // `.env`/`.env.local` is occasionally a directory (e.g. a Python
+      // virtualenv named `.env`), so read directly and skip on failure rather
+      // than guarding with existsSync, which returns true for directories and
+      // lets readFileSync throw EISDIR.
+      content = fs.readFileSync(envPath, 'utf8');
+    } catch {
+      continue;
+    }
+    const match = content.match(/^POSTHOG_PERSONAL_API_KEY=(.+)$/m);
+    if (match) {
+      return match[1].trim();
     }
   }
   return undefined;