Well I have spent a lot of time on how does it work becaouse one of my client whou really want to get that feature working.
So this is the way how I understand it:
CC panel is reading cover in order which You have set in Settings->Albums->Settings tab.
I.e. My order is "Embeded, Custom", so if CC won't find album cover in mp3 file then it's going to check is there custom cover for this mp3.
Custom Album Cover is set by going into Media, click on some Artist and then right click on album name "Edit album detials".
Ove there You fill in field "Cover image url" providing url to image which should be assigned to album.
Please note that image is not downloaded on the server but in <img > tag is provided above link to image.
If custom cover image url is empty then nocover.png image apply.
I don't know about reading album covers from files. I think Your clients way to display album covers is wrong but I may be wrong