A tool is someone who can't think for themselves. Someone who is easily taken advantage of, picked on and made a fool out of. Someone who is being used and doesn't even realize it. Someone who tries too hard to please others. Someone who can't defend themselves.
These acts give people the impression that the "tool" doesn't have a brain or any common sense and as a result all they are good for is being used, like a tool(hence the insult).
Being called a tool is NOT a compliment.
"Eric is such a tool. He doesn't even realize that all these people are just making fun of him."
"Yeah. I really feel bad for that kid."