A method for controlling an electric machine having current sensors for less than every phase of the electric machine includes operating a processor to perform a test to preliminarily determine whether a fault exists in one or more of the current sensors and a test to finally determine that the fault exists in the one or more current sensors. The method further includes operating the processor to utilize a state observer of the electric machine to estimate states of the electric machine, wherein the state observer is provided state input measurements from each non-faulty current sensor, if any. Measurements from the current sensor or sensors determined to be faulty are disregarded. The processor controls the electric machine utilizing results from the state observer.