This happened to one of our games. It was a five player game and two players got killed. Now there's only three left and for the next administration, only the President hasn't been elected yet. The other players are the previous round's President and Chancellor respectively. What happens in this case, does the election automatically fail? We ended up just voting to fail that election but I'm curious as to what the official answer is.
According to the rules:
If there are only 5 players left in the game, only the last elected Chancellor is ineligible to be the Chancellor Candidate; the last President may be nominated.
So in the situation you described the last President should have been nominated as Chancellor.