I assume you normally have the last option ticked for artwork which you say doesnt work.
There is nothing unusual in these settings and the same as what i have tested with, without any issues for the artwork being copied (folder.jpg or organised artwork, with or without resizing).
The only other possibility I can think of, could you confirm the files are not single albums that are split by a cuesheet?
edit:
try putting a .jpg after <album> ie. <album>.jpg
edit 2:
i am sure that is the problem and will be fixed for the next update