This article presents a new technique for detecting and localizing the open-circuit (OC) faults in the semiconductor switches of the Highly Efficient and Reliable Inverter Concept (HERIC) converter. It is a transformerless Photovoltaic (PV) inverter based on the full-bridge topology, with two extra switches on the AC side called ac bypass switches. The proposed method uses a sliding mode observer (SMO) to detect faults in the AC bypass switch and main switches of the full bridge inverter. To diagnose OC faults in the AC bypass leg, two parallel SMOs are created based on the converter’s state space model. Similarly, two SMOs are designed for the main switches. A residual is generated by combining the observed and measured grid currents to accurately locate the OC fault within the inverter system. To localize the faulty main switch, once the fault is detected the inverter is reconfigured and based on the grid current the faulty switch is identified. A major benefit of this method is that it does not rely on additional sensors for fault diagnosis, making the system more robust. The effectiveness and reliability of this approach are demonstrated through simulation studies. In addition, a laboratory prototype is developed to validate the practical applicability of the method.