Nowadays, marine vessels constitute safety-critical assets facilitating the transport of millions of passengers and tons of cargo worldwide. As such, they require a large number of heterogeneous sensors dispersed in the various on-board machinery for operational and condition monitoring of their vital systems, such as the propulsion system. Despite the vast availability of data from on-board sensors, there is hardly any collaboration between the spatially distributed sensor devices to boost vessel performance. Up to this day, physical redundancy has been mostly discussed in maritime literature. The use of virtual sensors (software-based) has not been properly investigated yet for maritime applications, despite their successful application in other fields like aircraft control and process control. This paper proposes a novel switching mechanism to alternate between physical and virtual sensors used in the primary propulsion control layer of marine vessels aiming to compensate for the effects of sensor faults. The switching mechanism focuses on ensuring the safe performance of the propulsion grid after the sensor faults occur. The software sensors are constructed using mathematical models describing the nonlinear dynamics of the propulsion system and the input and sensor output data. Simulation results are used to illustrate the switching mechanism’s performance in the case of a hybrid propulsion system, where the different subsystems are controlled in a distributed configuration.