The fault estimation (FE) and fault‐tolerant control (FTC) problems are studied for the switched system with sensor fault, actuator fault, and stochastic noise. The dynamic FE observers are used to reconstruct the system states and faults at the same time. Differently from the classical observer design method, in the process of observers design, both the output information and its derivative are introduced to improve the estimation performance, especially in the case of the systems subject time‐varying fault. Based on the coordinate transformation, the output derivative is not appeared in the observers, which means that the proposed dynamic observers can be used for the cased that the output derivative is unmeasured. Utilizing the estimate information, the observer‐based FTC scheme is given. For any switching signal, the linear matrix inequality (LMI) conditions are provided, which can ensure that the entire system is mean‐square exponentially stable (MSES). Finally, simulation examples show the effectiveness of the observer and controller.