Abstract Background Major depressive disorder (MDD) is a leading cause of disability worldwide and occurs commonly first during adolescence. The insular cortex (IC) plays an important role in integrating emotion processing with interoception and has been implicated recently in the pathophysiology of adult and adolescent MDD. However, no studies have yet specifically examined the IC in adolescent MDD during processing of faces in the sad-happy continuum. Thus, the aim of the present study is to investigate the IC during sad and happy face processing in adolescents with MDD compared to healthy controls (HCL). Methods Thirty-one adolescents (22 female) with MDD and 36 (23 female) HCL underwent a well-validated emotional processing fMRI paradigm that included sad and happy face stimuli. Results The MDD group showed significantly less differential activation of the anterior/middle insular cortex (AMIC) in response to sad versus happy faces compared to the HCL group. AMIC also showed greater functional connectivity with right fusiform gyrus, left middle frontal gyrus, and right amygdala/parahippocampal gyrus in the MDD compared to HCL group. Moreover, differential activation to sad and happy faces in AMIC correlated negatively with depression severity within the MDD group. Limitations Small age-range and cross-sectional nature precluded assessment of development of the AMIC in adolescent depression. Conclusions Given the role of the IC in integrating bodily stimuli with conscious cognitive and emotional processes, our findings of aberrant AMIC function in adolescent MDD provide a neuroscientific rationale for targeting the AMIC in the development of new treatment modalities.