I found a solution in the askubuntu forum that works for me.
http://askubuntu.com/questions/736923/vlc-not-displaying-video-properly-
in-fullscreen#

In short:
Tools > Preferences > Video > Output change to "OpenGL GLX video output(XCB), 
save and restart vlc.

This fixed both the blue screen and the occlusion for me!

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https://bugs.launchpad.net/bugs/1537053

Title:
  vlc screen always on top, buggly.

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