The phrase is basically saying that bad design causes people to make mistakes.
Design-induced - the interaction design or user experience is problematic.
Pilot error - the pilot made a mistake.
An example of this would be the placement of a flap handle next to a gear lever, making it possible to raise the gear rather than the flaps after landing.
Engine controls in modern designs now feature different shapes for each control knob for similar reasons. There have been many accidents where pilots have grabbed a mixture knob — and shut an engine off completely — when they meant to grab the throttle and reduce power. Different textures and shapes make that harder to do: