Rustle,
I've used a variety of things. Synthetic trainers (FNPT2 devices in JAR-speak) such as ATC-710 & -810s, another by Hawker Pacific, Frasca types including one on hydraulic rams and lastly a Link trainer on gymbals.
These all let you fail just about any combination of instruments. Some better than others. Some allowed you to either program a type of failure or manually change instrument displays.
In the air I used suction cup covers. Available from various pilot shops for not very much (Not very much for aviation, that is. A lot considering what they are!
)
I'd cover up various combinations to simulate single failures up to a system failure.
It's not really possible to simulate the subtlety of instrument failures in the aircraft (apart from electric gyros: pull the circuit breaker when the student isn't aware) - unless you have a real failure.
Don't laugh too hard. I had one unlucky student get avac. pump failure at night in a C172 then a week or so later get an AH failure while I was doing his Night VFR test.
He handled it well enough to pass comfortably, BTW. It was fortunate that all the mandatory test items were completed.
System/instrument failures are one of the truly great advantages of good synthetic trainers.
FFF has suggested what my initial actions would be: Ensure terrain clearance by climbing. Then scream like *@****** to ATC!