This paper describes a fault-tolerant control system for a high-performance induction motor drive that propels an electrical vehicle (EV) or hybrid electric vehicle (HEV). In the proposed control scheme, the developed system takes into account the controller transition smoothness in the event of sensor failure. Moreover, due to the EV or HEV requirements for sensorless operations, a practical sensorless control scheme is developed and used within the proposed fault-tolerant control system. This requires the presence of an adaptive flux observer. The speed estimator is based on the approximation of the magnetic characteristic slope of the induction motor to the mutual inductance value. Simulation results, in terms of speed and torque responses, show the effectiveness of the proposed approach.