Single-nucleotide polymorphisms (SNPs) within tnfaip3 (A20) associate with susceptibility to autoimmune and inflammatory diseases including type-1-diabetes. How polymorphisms within the A20 locus contribute to disease at the tissue level is not understood. In a genome-wide ENU-mutagenesis screen of C57BL/6 mice we identified a mouse line harboring a non-synonymous amino-acid change of the evolutionary conserved isoleucine at amino-acid position 325 within the A20 OTU domain (A20I325N). We tested its effect on islet homeostasis. When challenged with mild inflammatory stress by syngeneic transplantation, A20I325N/I325N islet grafts show abnormal production of inflammatory factors and immune infiltration with severe glucose intolerance due to impaired beta-cell function. When directly challenged with an immunological insult in the form of allogeneic transplantation, A20I325N/I325N islet grafts were hyper-inflammatory and more rapidly destroyed compared to WT allogeneic grafts. When stimulated with TNF, A20I325N cells exhibited delayed formation of the A20-TAX1BP1-ITCH-RNF11 protein ubiquitin editing complex and exaggerated poly-ubiquitination of RIP1. This resulted in increased accumulation of RIP1 with enhanced NF-κB and JNK/AP1 activation. Conversely, ectopic expression of WT A20 rescued the hyperinflammatory phenotype of A20I325N islets; suggesting that A20 may be used therapeutically to suppress tissue inflammation. Indeed, forced expression of A20 allowed permanent (>100 days) survival of ~50% of islet grafts across a full MHC-mismatch in which all control grafts are destroyed. The A20-expressing grafts at >100 days showed normal morphology, high frequencies of intra-graft antigen-specific regulatory T-cells with high expression of IL-10 & TGF-beta. Human GWAS associate polymorphisms within the A20 OTU domain with inflammatory disease. Our data show how SNP’s within the OTU domain uncouple A20’s protective effect, disrupting tissue inflammatory homeostasis, and provide a model for understanding how A20 polymorphisms contribute to human disease