An important part of combat is using the environment to your advantage - terrain can offer you something to duck behind to avoid an attack. Anything solid that can physically deflect or stop an attack is cover. When you have cover, you gain a cover bonus to your armor, reflex and fortitude defenses based on the amount of cover available. This bonus can range from +1 for something flimsy or small like a young sapling, to +5 for hiding behind a solid steel door while peeking out occasionally to aim.
Depending on the layout of the battlefield, an object can provide cover against attacks from one direction but not another. For example, if your back is to a chest-high wall, you would receive cover from the wall for all attacks that come from the other side of that wall, but would not receive cover from attacks that originate from the same side of the wall as you.
In addition to terrain, shields also provide cover. A shield provides between a +1 and +5 cover bonus, depending on the size of the shield. Shields provide cover from all directions, because you are assumed to be maneuvering to position the shield between yourself and attacks. If you would receive cover from both a shield and terrain, only the highest cover bonus applies.