What does it mean?
This means that a message on the chat server was flagged as spam/offensive, and you are asked to review it.
If you mark it as valid, the number of flags on the message is incremented (and decremented if you mark it as invalid). If it reaches 6, then the message is deleted and the user is suspended from chat for 30 minutes or more.
How should I handle it?
If you don't want the hassle or are unsure how to proceed, just click "not sure".
Check the context first by going to the transcript (there ought to be a link in the flagging dialog). There is a chance that a message that looks offensive was simply meant to be a joke directed at a friend. There are many rooms where playful jibes are common. Watch the tone in the room and decide accordingly. However, if a message seems to be a personal attack (again, where it is obviously not as a joke), validate the flag.
In addition, strong language is allowed in some rooms. If the room is active and the regulars seem to not mind the language, ignore it. However, if the room is empty or the people who are around seem horrified, validate it. You may wish to read the answers here for a better idea of what is and isn't allowed in chat.
Pornography and other explicit/nsfw imagery should be validated as well.
Always, try to make an informed decision. Do not drop into the room to chastise the user unless you are certain that the message was out of line.
As a diamond moderator, how does this change?
As a diamond mod your chat flags are binding, thus a valid vote will immediately ban the user, and an invalid vote will clear the flags. Dismiss the indicator with "not sure" if you don't want to be bothered.
Otherwise, be extra careful when checking the context. Most often, the flag gets validated before you finish doing this. That's all right, if you feel that the message was not flag-worthy given the context, feel free to unsuspend the user. Asking others in the chat room about the suspension helps, though it may end up causing drama.