Pulmonary inflammation is associated with altered lipid synthesis and clearance related to diabetes, obesity, and various inherited metabolic disorders. In many tissues, lipogenesis is regulated at the transcriptional level by the activity of sterol-response element-binding proteins (SREBP). The role of SREBP activation in the regulation of lipid metabolism in the lung was assessed in mice in which both Insig1 and Insig2 genes, encoding proteins that bind and inhibit SREBPs in the endoplasmic reticulum, were deleted in alveolar type 2 cells. Although deletion of either Insig1 or Insig2 did not alter SREBP activity or lipid homeostasis, deletion of both genes (Insig1/2(Δ/Δ) mice) activated SREBP1, causing marked accumulation of lipids that consisted primarily of cholesterol esters and triglycerides in type 2 epithelial cells and alveolar macrophages. Neutral lipids accumulated in type 2 cells in association with the increase in mRNAs regulating fatty acid, cholesterol synthesis, and inflammation. Although bronchoalveolar lavage fluid phosphatidylcholine was modestly decreased, lung phospholipid content and lung function were maintained. Insig1/2(Δ/Δ) mice developed lung inflammation and airspace abnormalities associated with the accumulation of lipids in alveolar type 2 cells, alveolar macrophages, and within alveolar spaces. Deletion of Insig1/2 activated SREBP-enhancing lipogenesis in respiratory epithelial cells resulting in lipotoxicity-related lung inflammation and tissue remodeling.