Chronically elevated fatty acids contribute to insulin resistance through poorly defined mechanisms. Endoplasmic reticulum (ER) stress and the subsequent unfolded protein response (UPR) have been implicated in lipid-induced insulin resistance. However, the UPR is also a fundamental mechanism required for cell adaptation and survival. We aimed to distinguish the adaptive and deleterious effects of lipid-induced ER stress on hepatic insulin action. Exposure of human hepatoma HepG2 cells or mouse primary hepatocytes to the saturated fatty acid palmitate enhanced ER stress in a dose-dependent manner. Strikingly, exposure of HepG2 cells to prolonged mild ER stress activation induced by low levels of thapsigargin, tunicamycin, or palmitate augmented insulin-stimulated Akt phosphorylation. This chronic mild ER stress subsequently attenuated the acute stress response to high-level palmitate challenge. In contrast, exposure of HepG2 cells or hepatocytes to severe ER stress induced by high levels of palmitate was associated with reduced insulin-stimulated Akt phosphorylation and glycogen synthesis, as well as increased expression of glucose-6-phosphatase. Attenuation of ER stress using chemical chaperones (trimethylamine N-oxide or tauroursodeoxycholic acid) partially protected against the lipid-induced changes in insulin signaling. These findings in liver cells suggest that mild ER stress associated with chronic low-level palmitate exposure induces an adaptive UPR that enhances insulin signaling and protects against the effects of high-level palmitate. However, in the absence of chronic adaptation, severe ER stress induced by high-level palmitate exposure induces deleterious UPR signaling that contributes to insulin resistance and metabolic dysregulation.