diff --git a/cluster-autoscaler/cloudprovider/azure/azure_scale_set.go b/cluster-autoscaler/cloudprovider/azure/azure_scale_set.go
index ffeae2b7c0..7cff4e1af6 100644
--- a/cluster-autoscaler/cloudprovider/azure/azure_scale_set.go
+++ b/cluster-autoscaler/cloudprovider/azure/azure_scale_set.go
@@ -679,6 +679,13 @@ func instanceStatusFromProvisioningState(provisioningState *string) *cloudprovid
 		status.State = cloudprovider.InstanceDeleting
 	case string(compute.ProvisioningStateCreating):
 		status.State = cloudprovider.InstanceCreating
+	case string(compute.ProvisioningStateFailed):
+		status.State = cloudprovider.InstanceCreating
+		status.ErrorInfo = &cloudprovider.InstanceErrorInfo{
+			ErrorClass:   cloudprovider.OutOfResourcesErrorClass,
+			ErrorCode:    "provisioning-state-failed",
+			ErrorMessage: "Azure failed to provision a node for this node group",
+		}
 	default:
 		status.State = cloudprovider.InstanceRunning
 	}
diff --git a/cluster-autoscaler/cloudprovider/azure/azure_scale_set_test.go b/cluster-autoscaler/cloudprovider/azure/azure_scale_set_test.go
index cf5a4f6d0c..0897fe25b2 100644
--- a/cluster-autoscaler/cloudprovider/azure/azure_scale_set_test.go
+++ b/cluster-autoscaler/cloudprovider/azure/azure_scale_set_test.go
@@ -225,6 +225,48 @@ func TestIncreaseSize(t *testing.T) {
 	}
 }
 
+func TestIncreaseSizeOnVMProvisioningFailed(t *testing.T) {
+	ctrl := gomock.NewController(t)
+	defer ctrl.Finish()
+
+	manager := newTestAzureManager(t)
+	vmssName := "vmss-failed-upscale"
+
+	expectedScaleSets := newTestVMSSList(3, "vmss-failed-upscale", "eastus", compute.Uniform)
+	expectedVMSSVMs := newTestVMSSVMList(3)
+	expectedVMSSVMs[2].ProvisioningState = to.StringPtr(string(compute.ProvisioningStateFailed))
+
+	mockVMSSClient := mockvmssclient.NewMockInterface(ctrl)
+	mockVMSSClient.EXPECT().List(gomock.Any(), manager.config.ResourceGroup).Return(expectedScaleSets, nil)
+	mockVMSSClient.EXPECT().CreateOrUpdateAsync(gomock.Any(), manager.config.ResourceGroup, vmssName, gomock.Any()).Return(nil, nil)
+	mockVMSSClient.EXPECT().WaitForCreateOrUpdateResult(gomock.Any(), gomock.Any(), manager.config.ResourceGroup).Return(&http.Response{StatusCode: http.StatusOK}, nil).AnyTimes()
+	manager.azClient.virtualMachineScaleSetsClient = mockVMSSClient
+	mockVMSSVMClient := mockvmssvmclient.NewMockInterface(ctrl)
+	mockVMSSVMClient.EXPECT().List(gomock.Any(), manager.config.ResourceGroup, "vmss-failed-upscale", gomock.Any()).Return(expectedVMSSVMs, nil).AnyTimes()
+	manager.azClient.virtualMachineScaleSetVMsClient = mockVMSSVMClient
+	manager.explicitlyConfigured["vmss-failed-upscale"] = true
+	registered := manager.RegisterNodeGroup(newTestScaleSet(manager, vmssName))
+	assert.True(t, registered)
+	manager.Refresh()
+
+	provider, err := BuildAzureCloudProvider(manager, nil)
+	assert.NoError(t, err)
+
+	scaleSet, ok := provider.NodeGroups()[0].(*ScaleSet)
+	assert.True(t, ok)
+
+	// Increase size by one, but the new node fails provisioning
+	err = scaleSet.IncreaseSize(1)
+	assert.NoError(t, err)
+
+	nodes, err := scaleSet.Nodes()
+	assert.NoError(t, err)
+
+	assert.Equal(t, 3, len(nodes))
+	assert.Equal(t, cloudprovider.InstanceCreating, nodes[2].Status.State)
+	assert.Equal(t, cloudprovider.OutOfResourcesErrorClass, nodes[2].Status.ErrorInfo.ErrorClass)
+}
+
 func TestIncreaseSizeOnVMSSUpdating(t *testing.T) {
 	ctrl := gomock.NewController(t)
 	defer ctrl.Finish()