thanks for your explanation.I have expanded some thoughts below partially to see if I have it right and partially to address the OP question.
I want to have a location that Media Center doesn't touch, in case something accidentally removes or overwrites my album art, because there is no way to undo that - and I've had that happen a few times now.
Thats what you have by creating your own cover art folder. If the you made it the "default" folder for MC, wouldn't that defeat the purpose??
Originally I was just storing a Folder.jpg alongside the files (with Media Center handling its art in %APPDATA%\J River\Media Center 18\Cover Art) but then you run into problems when you want to rename/move folders.
I agree using the AppData location and folder.jpg are both problematic. I have changed the Cover art directory to my media drive as I do not want my data mixed in with operating files in case I need to Re OS.I also changed the thumnails cache with a registry change.I then can easily backup these locations in case the originals get messed with.
As you say,whether in AppData or moved elsewhere, this is the MC default covert art location and it creates its own Albums,Artists,Files,Seasons,Series,Videos Folders. Im my case the "Albums" are empty as it represents where audio art is placed.In options I have placed this in "same folder as file" as I like everything together.You can however apparently choose ANY folder as implied by the "in a specified folder" option.
Video Cover art.Now this looks like it has changed in the latest version.There is no longer an option to place the sidecar xml file alongside file.Im guessing it now does this automatically.
The seasons and Series folders, unlike the audio art, must stay in the default cover art folder for MC to create separate art for these things and not confused with album or episode art.You may need to create these folders manually if they dont exist.
Finally I tick the option to embed the art into file where possible. Video files dont support this, thus the need for sidecar files.