Protective components are commonly found in systems where failure propagation can occur. When these protective components are also subject to failure, inspection and maintenance (IM) policy for both the core components (which directly contribute to the system’s performance), and the protective components must be designed separately. The challenge arises when failure propagation happens only in certain failure modes of the components, which have not been extensively studied yet. In this paper, we propose an optimal hybrid IM policy for such a system. First, we develop a novel hybrid IM policy that outperforms some existing IM schemes. Based on this policy, the system state transitions are modeled by the Markov regenerative process (MRGP) framework and its steady-state behavior is analytically obtained. Next, we quantitatively model the system’s long-term profit rate. A case study of a community power distribution system is presented to demonstrate the effectiveness of the proposed hybrid IM policy.