Type 2 diabetes (T2D) is associated with insulin resistance, impaired insulin secretion from the pancreatic β-cell, and nonalcoholic fatty liver disease (NAFLD). SWELL1 (LRRC8a) ablation impairs adipose and skeletal muscle insulin-pAKT2 signaling, β-cell insulin secretion and glycemic control - suggesting that SWELL1-LRRC8 complex dysfunction contributes to T2D pathogenesis. Here, we show that ICl,SWELL and SWELL1 protein are reduced in adipose and β-cells in murine and human T2D. Combining cryo-electron microscopy, molecular docking, medicinal chemistry, and functional studies, we define a structure activity relationship to rationally-designed active derivatives (SN-40X) of a SWELL1 channel inhibitor (DCPIB/SN-401), that bind the SWELL1-LRRC8 hexameric complex, restore SWELL1-LRRC8 protein, plasma membrane trafficking, signaling and islet insulin secretion via SWELL1-dependent mechanisms. In vivo, SN-401 and active SN-40X compounds restore glycemic control and prevents NAFLD by improving insulin-sensitivity and insulin secretion in murine T2D. These findings demonstrate that small molecule SWELL1 modulators restore SWELL1-dependent insulin-sensitivity and insulin secretion in T2D and may represent a first-in-class therapeutic approach for T2D and NAFLD.