Microsoft Word will mark contractions like “I’m”, “don’t”, and “doesn’t”, as grammatical errors, showing that dashed line under them. For more casual documents, this can be annoying.
In certain very formal workplaces, or under very formal style guides, contractions may be considered inappropriate and too informal. That’s why Microsoft Word has this option. But, if think contractions are fine—and they are, in most situations—you can tell Word not to bug you about them.