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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You received this bug notification because you are a member of Ubuntu-X,
which is subscribed to xserver-xorg-video-intel in Ubuntu.
https://bugs.launchpad.net/bugs/1537053

Title:
  vlc screen always on top, buggly.

To manage notifications about this bug go to:
https://bugs.launchpad.net/ubuntu/+source/xserver-xorg-video-intel/+bug/1537053/+subscriptions

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