A fault leading to a thermal runaway in a lithium-ion battery is believed to grow over time from a latent defect. Significant efforts have been made to detect lithium-ion battery safety faults to proactively facilitate actions minimizing subsequent losses. Scaling up a battery greatly changes the thermal and electrical signals of a system developing a defect and its consequent behaviors during fault evolution. In a large-capacity system such as a battery for an electric vehicle, detecting a fault signal and confining the fault locally in the system are extremely challenging. This paper introduces a fail-safe design methodology for large-capacity lithium-ion battery systems. Analysis using an internal short circuit response model for multi-cell packs is presented that demonstrates the viability of the proposed concept for various design parameters and operating conditions. Locating a faulty cell in a multiple-cell module and determining the status of the fault's evolution can be achieved using signals easily measured from the electric terminals of the module. A methodology is introduced for electrical isolation of a faulty cell from the healthy cells in a system to prevent further electrical energy feed into the fault. Experimental demonstration is presented supporting the model results.