With increased developments and interest in cooperative driving and higher levels of automation (SAE level 3+), the need for safety systems that are capable to monitor system health and maintain safe operations in faulty scenarios is increasing. A variety of faults or failures could occur, and there exists a high variety of ways to respond to such events. Once a fault or failure is detected, there is a need to classify its severity and decide on appropriate and safe mitigating actions. To provide a solution to this mitigation challenge, in this paper a functional-safety architecture is proposed and an optimization-based mitigation algorithm is introduced. This algorithm uses nonlinear model predictive control (NMPC) to bring a vehicle, suffering from a severe fault, such as a power steering failure, to a safe-state. The internal model of the NMPC uses the information from the fault detection, isolation and identification to optimize the tracking performance of the controller, showcasing the need of the proposed architecture. Given a string of ACC vehicles, our results demonstrate a variety of tactical decision-making approaches that a fault-affected vehicle could employ to manage any faults. Furthermore, we show the potential for improving the safety of the affected vehicle as well as the effect of these approaches on the duration of the manoeuvre.