Insig-1 and Insig-2, closely related endoplasmic reticulum membrane proteins, mediate transcriptional and post-transcriptional mechanisms that assure cholesterol homeostasis through their sterol-induced binding to Scap (SREBP cleavage-activating protein) and 3-hydroxy-3-methylglutaryl coenzyme A reductase. Recent studies show that Insig-1 (but not Insig-2) is ubiquitinated and rapidly degraded when cells are depleted of sterols. Conversely, ubiquitination of Insig-1 is blocked, and the protein is stabilized when intracellular sterols accumulate. Here, we report that the ubiquitin ligase gp78, which binds with much higher affinity to Insig-1 than Insig-2, is required for ubiquitination and degradation of Insig-1 in sterol-depleted cells. Sterols prevent Insig-1 ubiquitination and degradation by displacing gp78 from Insig-1, an event that results from sterol-induced binding of Scap to Insig-1. In addition to providing a mechanism for sterol-regulated degradation of Insig-1, these results help to explain why Scap is subject to endoplasmic reticulum retention upon Insig-1 binding, whereas 3-hydroxy-3-methylglutaryl coenzyme A reductase is ubiquitinated and degraded.