When a driver ahead of me says "BLUE FLAG" or something similar, do I have a right to race them? I'm really not sure what to do in this kind of situation...
I am assuming that you mean the driver behind you spams or says blue flag in the chat box. When this person says a blue flag message in the chat they have just automatically waived any blue flag rights they would have had under normal racing conditions and you can race them as if it was for position.
If the driver doesn't say blue flag and you have a blue flag message on your screen you are supposed to hold your line and the faster driver must go off the racing line to complete the pass, as a general rule. It is recommended that the driver with the blue flag 'goes wide' for corners to allow the faster driver past it's not a requirement and the car doing the lapping has the responsibility to prevent any incidents.