Abstract Fault input channels represent a major challenge for observer design for fault estimation. Most works in this field assume that faults enter in such a way that the transfer functions between these faults and a number of measured outputs are strictly positive real (SPR), that is, the observer matching condition is satisfied. This paper presents a systematic approach to adaptive observer design for joint estimation of the state and faults when the SPR requirement is not verified. The proposed method deals with a class of Lipschitz nonlinear systems subjected to piecewise constant multiplicative faults. The novelty of the proposed approach is that it uses a rank condition similar to the observer matching condition to construct the adaptation law used to obtain fault estimates. The problem of finding the adaptive observer matrices is formulated as a Linear Matrix Inequality (LMI) optimization problem. The proposed scheme is tested on the nonlinear model of a single link flexible joint robot system.