diff --git a/x/gov/endblocker_test.go b/x/gov/endblocker_test.go
index 4b143926dc..bfc733b265 100644
--- a/x/gov/endblocker_test.go
+++ b/x/gov/endblocker_test.go
@@ -279,3 +279,50 @@ func TestProposalPassedEndblocker(t *testing.T) {
 	resTags := EndBlocker(ctx, input.keeper)
 	require.Equal(t, sdk.MakeTag(tags.ProposalResult, tags.ActionProposalPassed), resTags[1])
 }
+
+func TestEndBlockerProposalHandlerFailed(t *testing.T) {
+	input := getMockApp(t, 1, GenesisState{}, nil)
+	SortAddresses(input.addrs)
+
+	// hijack the router to one that will fail in a proposal's handler
+	input.keeper.router = NewRouter().AddRoute(RouterKey, badProposalHandler)
+
+	handler := NewHandler(input.keeper)
+	stakingHandler := staking.NewHandler(input.sk)
+
+	header := abci.Header{Height: input.mApp.LastBlockHeight() + 1}
+	input.mApp.BeginBlock(abci.RequestBeginBlock{Header: header})
+	ctx := input.mApp.BaseApp.NewContext(false, abci.Header{})
+
+	valAddr := sdk.ValAddress(input.addrs[0])
+
+	input.keeper.ck.SetSendEnabled(ctx, true)
+	createValidators(t, stakingHandler, ctx, []sdk.ValAddress{valAddr}, []int64{10})
+	staking.EndBlocker(ctx, input.sk)
+
+	// Create a proposal where the handler will pass for the test proposal
+	// because the value of contextKeyBadProposal is true.
+	ctx = ctx.WithValue(contextKeyBadProposal, true)
+	proposal, err := input.keeper.SubmitProposal(ctx, testProposal())
+	require.NoError(t, err)
+
+	proposalCoins := sdk.NewCoins(sdk.NewCoin(sdk.DefaultBondDenom, sdk.TokensFromTendermintPower(10)))
+	newDepositMsg := NewMsgDeposit(input.addrs[0], proposal.ProposalID, proposalCoins)
+	res := handler(ctx, newDepositMsg)
+	require.True(t, res.IsOK())
+
+	err = input.keeper.AddVote(ctx, proposal.ProposalID, input.addrs[0], OptionYes)
+	require.NoError(t, err)
+
+	newHeader := ctx.BlockHeader()
+	newHeader.Time = ctx.BlockHeader().Time.Add(input.keeper.GetDepositParams(ctx).MaxDepositPeriod).Add(input.keeper.GetVotingParams(ctx).VotingPeriod)
+	ctx = ctx.WithBlockHeader(newHeader)
+
+	// Set the contextKeyBadProposal value to false so that the handler will fail
+	// during the processing of the proposal in the EndBlocker.
+	ctx = ctx.WithValue(contextKeyBadProposal, false)
+
+	// validate that the proposal fails/has been rejected
+	resTags := EndBlocker(ctx, input.keeper)
+	require.Equal(t, sdk.MakeTag(tags.ProposalResult, tags.ActionProposalFailed), resTags[1])
+}
diff --git a/x/gov/test_common.go b/x/gov/test_common.go
index b9d857c0d6..7293112363 100644
--- a/x/gov/test_common.go
+++ b/x/gov/test_common.go
@@ -2,6 +2,7 @@ package gov
 
 import (
 	"bytes"
+	"fmt"
 	"log"
 	"sort"
 	"testing"
@@ -155,6 +156,28 @@ func testProposal() Content {
 	return NewTextProposal("Test", "description")
 }
 
+const contextKeyBadProposal = "contextKeyBadProposal"
+
+// badProposalHandler implements a governance proposal handler that is identical
+// to the actual handler except this fails if the context doesn't contain a value
+// for the key contextKeyBadProposal or if the value is false.
+func badProposalHandler(ctx sdk.Context, c Content) sdk.Error {
+	switch c.ProposalType() {
+	case ProposalTypeText, ProposalTypeSoftwareUpgrade:
+		v := ctx.Value(contextKeyBadProposal)
+
+		if v == nil || !v.(bool) {
+			return sdk.ErrInternal("proposal failed")
+		}
+
+		return nil
+
+	default:
+		errMsg := fmt.Sprintf("unrecognized gov proposal type: %s", c.ProposalType())
+		return sdk.ErrUnknownRequest(errMsg)
+	}
+}
+
 // checks if two proposals are equal (note: slow, for tests only)
 func ProposalEqual(proposalA Proposal, proposalB Proposal) bool {
 	return bytes.Equal(types.ModuleCdc.MustMarshalBinaryBare(proposalA),