Comparative gene identification 58 (CGI-58) is a lipid droplet-associated protein that promotes the hydrolysis of triglyceride by activating adipose triglyceride lipase. Loss-of-function mutations in CGI-58 in humans lead to Chanarin-Dorfman syndrome, a condition in which triglyceride accumulates in various tissues, including the skin, liver, muscle, and intestines. Therefore, without adequate CGI-58 expression, lipids are stored rather than used for fuel, signaling intermediates, and membrane biosynthesis. CGI-58 knockdown in mice using antisense oligonucleotide (ASO) treatment also leads to severe hepatic steatosis as well as increased hepatocellular diacylglycerol (DAG) content, a well-documented trigger of insulin resistance. Surprisingly, CGI-58 knockdown mice remain insulin-sensitive, seemingly dissociating DAG from the development of insulin resistance. Therefore, we sought to determine the mechanism responsible for this paradox. Hyperinsulinemic-euglycemic clamp studies reveal that the maintenance of insulin sensitivity with CGI-58 ASO treatment could entirely be attributed to protection from lipid-induced hepatic insulin resistance, despite the apparent lipotoxic conditions. Analysis of the cellular compartmentation of DAG revealed that DAG increased in the membrane fraction of high fat-fed mice, leading to PKCε activation and hepatic insulin resistance. However, DAG increased in lipid droplets or lipid-associated endoplasmic reticulum rather than the membrane of CGI-58 ASO-treated mice, and thus prevented PKCε translocation to the plasma membrane and induction of insulin resistance. Taken together, these results explain the disassociation of hepatic steatosis and DAG accumulation from hepatic insulin resistance in CGI-58 ASO-treated mice, and highlight the importance of intracellular compartmentation of DAG in causing lipotoxicity and hepatic insulin resistance.