(The iPhone's default behaviour is to sleep 30 seconds after the screen has gone off, when not docked and charging that is).
Insomnia is useful if you are running a logging application that you would want to keep working while your phone is locked and the display is off.
If you are using an IM or IRC client that you wish to stay connected to receive messages while the screen is off.
If you are the creator of a logging or IM application hopefully you can use the Insomnia source to build the ability to stay on into your application, without harmfully deleting power config files. e.g. ApolloIM and MobileChat.