Hepatic steatosis and steatonecrosis occur in nonalcoholic individuals, usually in a setting of obesity, type II diabetes mellitus, and after jejunoileal bypass. We propose an hypothesis for the pathogenesis of these hepatic lesions based on an observation in peritoneal dialysis patients. Hepatic histology was examined at autopsy in 11 patients with type I diabetes mellitus and renal failure who had received i.p. insulin in conjunction with continuous ambulatory peritoneal dialysis (CAPD). Steatosis in a unique subcapsular distribution occurred in 10 of 11 patients treated with i.p. insulin and in 0 of 9 controls receiving CAPD without insulin. Three of the 11 had steatonecrosis, 2 of whom had Mallory bodies. We suggest that insulin has an important role in the pathogenesis of steatosis and steatonecrosis. In CAPD patients the lesions occurred only under the capsule where concentrations of insulin are high secondary to its i.p. administration. In obese patients the lesions occur throughout the liver where insulin concentrations are high because of elevated levels in the portal vein. Free fatty acids (FFA) are oxidized in the liver by a pathway that is blocked by insulin. In the presence of insulin, FFA are preferentially esterified into triglycerides which accumulate in large quantities leading to steatosis; small amounts of FFA escaping local control may lead to membrane injury and steatonecrosis. Steatosis and/or steatonecrosis will occur when there is insulin secretion sufficient to block FFA oxidation but not sufficient to block FFA mobilization from adipose tissue.(ABSTRACT TRUNCATED AT 250 WORDS)