Lorne is situated on a bay named after Captain Louttit, who sought shelter there in 1841 while supervising the retrieval of cargo from a nearby shipwreck. The coast was surveyed five years later in 1846. The first European settler was William Lindsay, a timber-cutter who began felling the area in 1849. Subdivision began in 1869 and in 1871 the town was named after the Marquess of Lorne from Scotland. The Post Office opened on 29 April 1874.
In 1891, the area was visited by Rudyard Kipling who was inspired to write the poem Flowers, which included the line:
Buy my hot-wood clematis,
Buy a frond of fern,
Gathered where the Erskine leaps
Down the road to Lorne.
By 1922 the Great Ocean Road was extended to Lorne, making the town much more accessible.