For effective operation of microgrid systems (MGSs), it is important to understand the major types of power grid failures and how to deal with them. Detecting the fault, locating it, and isolating the faulty line are important to avoid damaging components and interrupting the service for customers. This will also improve the reliability and protection level of the system during fault conditions. Among the most successful protection methods to limit fault currents in power systems is the fault current limiter (FCL). The FCL improves the reliability of the system, voltage stability, and the fault current reduction. However, limited researches consider its applications inMGSs. The location and impedance size of the FCL play a major role in limiting fault currents in the system. Several studies concluded that installing FCLs near all generators, transformers, or loads in the system enhanced the performance of the system during fault conditions. However, increasing the number of FCLs in the system leads to an increase in cost. This dissertation proposes several effective approaches to specify the optimal locations and impedance values of the required number of installed FCLs in a grid-connected MGS. These FCLs improve the reliability and the protection level of the system by limiting fault currents during fault conditions. The goal is to reduce the required number of installed FCLs in the system. These installed FCLs must be able to reduce fault currents under the interrupting ratings of circuit breakers in the system. This goal will lead to lower the cost of installed protection devices in the system. In order to achieve this goal, this dissertation presents a novel fault management approach, sensitivity analysis, and an optimization model to find the optimal solutions. The study of this dissertation is meant to be used during the planning stage of power distribution system design. The results of this dissertation prove the robustness of the proposed approaches. This enhances the system’s performance while minimizing the required number of installed FCLs. Their sizes limit fault currents within safe ranges. Thus, the FCL significantly improves the reliability and protection scheme of the grid-connected MGS.