Fault isolation is the practice of designing systems such that when "something bad" happens, the negative consequences are limited in scope. Limiting the scope of problems reduces the potential for damage and makes systems easier to maintain.
The typical method of fault isolation is to create boundaries between system components, and ensure that the effects of faults don't cross the boundaries or that they are limited. Examples of isolation boundaries are:
Note that for fault isolation to have benefit, it is necessary that components be designed in such a way that they can function, or at least shut themselves down cleanly, in the absence of a failed component.
See also FaultTolerance AntiFragile