Genome architecture is regulated by chromatin insulator proteins, and misregulation of insulator function is associated with genome instability and transcriptional regulatory defects in both vertebrates and Drosophila. Indeed, mutations of the sole insulator protein in humans, CTCF, are carcinogenic and mutations in the Drosophila insulator protein Suppressor of Hairy wing [Su(Hw)] lead to chromosomal rearrangements. However, the mechanism that links the DNA damage response and the regulation of transcription with insulator function is not yet understood. Here we show that enrichment of Su(Hw) insulator proteins at insulator sites increases after DNA damage. Additionally, Su(Hw) is necessary for phosphorylation of the histone variant H2Av in response to both UV treatment and X-ray irradiation. The requirement of Su(Hw) for H2Av phosphorylation appears to be tissue-specific, since H2Av is phosphorylated in response to DNA damage also in neurons, where Su(Hw) is not normally expressed. Similarly, we provide evidence that Su(Hw) and H2Av work together to ensure proper development of the lymph gland in Drosophila larvae. We show that H2Av regulates formation of the larval lymph gland, and mutation of H2Av causes formation of large melanotic tumors that are rescued by mutation of su(Hw) in the His2Av810 mutant background. Double mutants of su(Hw)- and His2Av810 also form supernumerary lymph gland lobes that are larger than in wild type. Our findings support a role for the Su(Hw) in the DNA damage response through the regulation of H2Av phosphorylation and suggest that Su(Hw) and H2Av also work together to ensure proper development of the lymph gland.