Hey Rahul,
Yes, that's the expected behavior, even if it is probably surprising.
I will not start on how it all got to where it is, but basically the isn't a _strict_ overflow mode in Ehcache.
The option remains there in the sake of backwards compatibility, i.e. it will use more than the heap and the data on disk will not be reused across restarts.
There is a new Java API into the disk usage settings of Caches, also exposed through XML iirc, but we can't deprecate the "old" one in XML sadly enough.
That being said, other than disk usage, you shouldn't get a latency hit from that given behavior.
Hope this clarifies somewhat...
Alex