Chromatin insulators are responsible for orchestrating long-range interactions between enhancers and promoters throughout the genome and align with the boundaries of Topologically Associating Domains (TADs). Here, we demonstrate an association between gypsy insulator proteins and the phosphorylated histone variant H2Av (γH2Av), normally a marker of DNA double strand breaks. Gypsy insulator components colocalize with γH2Av throughout the genome, in polytene chromosomes and in diploid cells in which Chromatin IP data shows it is enriched at TAD boundaries. Mutation of insulator components su(Hw) and Cp190 results in a significant reduction in γH2Av levels in chromatin and phosphatase inhibition strengthens the association between insulator components and γH2Av and rescues γH2Av localization in insulator mutants. We also show that γH2Av, but not H2Av, is a component of insulator bodies, which are protein condensates that form during osmotic stress. Phosphatase activity is required for insulator body dissolution after stress recovery. Together, our results implicate the H2A variant with a novel mechanism of insulator function and boundary formation.