Piwi-interacting RNAs (piRNAs) control transposable element (TE) activity in the germline. piRNAs are produced from single-stranded precursors transcribed from distinct genomic loci, enriched by TE fragments and termed piRNA clusters. The specific chromatin organization and transcriptional regulation of Drosophila germline-specific piRNA clusters ensure transcription and processing of piRNA precursors. TEs harbour various regulatory elements that could affect piRNA cluster integrity. One of such elements is the suppressor-of-hairy-wing (Su(Hw))-mediated insulator, which is harboured in the retrotransposon gypsy. To understand how insulators contribute to piRNA cluster activity, we studied the effects of transgenes containing gypsy insulators on local organization of endogenous piRNA clusters. We show that transgene insertions interfere with piRNA precursor transcription, small RNA production and the formation of piRNA cluster-specific chromatin, a hallmark of which is Rhino, the germline homolog of the heterochromatin protein 1 (HP1). The mutations of Su(Hw) restored the integrity of piRNA clusters in transgenic strains. Surprisingly, Su(Hw) depletion enhanced the production of piRNAs by the domesticated telomeric retrotransposon TART, indicating that Su(Hw)-dependent elements protect TART transcripts from piRNA processing machinery in telomeres. A genome-wide analysis revealed that Su(Hw)-binding sites are depleted in endogenous germline piRNA clusters, suggesting that their functional integrity is under strict evolutionary constraints.