An instance, in addition to the other explanations already mentioned, can be for planets (or anything really) as well. Look in the top left of your screen and you'll see Dromund Kaas 1 or Dromund Kass 2 for example. When an area gets a certain number of players a second version is created to help lessen the load the servers have to process the game.
As for the difference between "Shield", "Armor", and "Defense" in mods and armor it affects the stats of the same name. Only "tank" classes can use shields. Game mechanic wise this was already answered, but to restate they all add together in various ways to make your character harder to kill. For a more detailed and mathematical answer check the various tank class forums (specifically there is a great thread in the Assassin forum).
http://www.swtor.com/community/showthread.php?t=78826