Dysfunctional adipose tissue is associated with an increased risk of developing type 2 diabetes (T2D). One characteristic of a dysfunctional adipose tissue is the reduced expandability of the subcutaneous adipose tissue leading to ectopic storage of fat in organs and/or tissues involved in the pathogenesis of T2D that can cause lipotoxicity. Accumulation of lipids in the skeletal muscle is associated with insulin resistance, but the majority of previous studies do not prove any causality. Most studies agree that it is not the intramuscular lipids per se that causes insulin resistance, but rather lipid intermediates such as diacylglycerols, fatty acyl-CoAs and ceramides and that it is the localization, composition and turnover of these intermediates that play an important role in the development of insulin resistance and T2D. Adipose tissue is a more active tissue than previously thought, and future research should thus aim at examining the exact role of lipid composition, cellular localization and the dynamics of lipid turnover on the development of insulin resistance. In addition, ectopic storage of fat has differential impact on various organs in different phenotypes at risk of developing T2D; thus, understanding how adipogenesis is regulated, the interference with metabolic outcomes and what determines the capacity of adipose tissue expandability in distinct population groups is necessary. This study is a review of the current literature on the adipose tissue expandability hypothesis and how the following ectopic lipid accumulation as a consequence of a limited adipose tissue expandability may be associated with insulin resistance in muscle and liver.