When you use this setting, traffic from known spam referral sites will be filtered out of your query results. These are sites that send fake traffic to your site in order to get you to visit their site. Normally, filtering out this fake traffic is a good idea as it improves your data quality, though you may get errors with some queries; if you do, try to run the query without this setting.
We base our spam referral filter on a list gathered by web analytics experts and published by Stu Bowker here. We update the list whenever we hear of sites that should be added.