Ectopic lipid accumulation in the liver is an almost universal feature of human and rodent models of generalized lipodystrophy and is also a common feature of type 2 diabetes, obesity, and metabolic syndrome. Here we explore the progression of fatty liver disease using a mouse model of lipodystrophy created by a fat-specific knockout of the insulin receptor (F-IRKO) or both IR and insulin-like growth factor 1 receptor (F-IR/IGFRKO). These mice develop severe lipodystrophy, diabetes, hyperlipidemia, and fatty liver disease within the first weeks of life. By 12 weeks of age, liver demonstrated increased reactive oxygen species, lipid peroxidation, histological evidence of balloon degeneration, and elevated serum alanine aminotransferase and aspartate aminotransferase levels. In these lipodystrophic mice, stored liver lipids can be used for energy production, as indicated by a marked decrease in liver weight with fasting and increased liver fibroblast growth factor 21 expression and intact ketogenesis. By 52 weeks of age, liver accounted for 25% of body weight and showed continued balloon degeneration in addition to inflammation, fibrosis, and highly dysplastic liver nodules. Progression of liver disease was associated with improvement in blood glucose levels, with evidence of altered expression of gluconeogenic and glycolytic enzymes. However, these mice were able to mobilize stored glycogen in response to glucagon. Feeding F-IRKO and F-IR/IGFRKO mice a high-fat diet for 12 weeks accelerated the liver injury and normalization of blood glucose levels. Thus, severe fatty liver disease develops early in lipodystrophic mice and progresses to advanced nonalcoholic steatohepatitis with highly dysplastic liver nodules. The liver injury is propagated by lipotoxicity and is associated with improved blood glucose levels.