Armour is applied to physical damage before it reaches your Life or Energy Shield.
Here is a quote from one of the game developers, Mark_GGG:
1) Avoiding the hit:
- Chance to hit (accuracy vs evasion) for attacks
- Chance to dodge for attacks, or spells with phase acrobatics
2) Avoiding the damage:
- Block chance for attacks, sometimes spells.
3) Mitigating the damage:
- Armour for physical damage.
- Resistances for non-physical damage.
4) Taking the damage:
- Non-chaos damage removed from energy shield until it's depleted.
- Remaining damage (including all chaos) removed from life.
Also FYI, armour does not reduce a certain percentage of all attacks. The amount it reduces is dependent upon the damage dealt. In order to get a 50% reduction of a 150 damaging attack you would need 1,800 Armour Rating. 1,800 Armour Rating would reduce a 300 damage attack by 33% and a 600 damage attack by 20%.