Mine is all the time. Everytime I listen to the iPod I have the generic placeholders. You can't turn the art "off" in MFT 3.5.1 only specify whether the primary source of art is gracenote or the mp3 player.
I may just try turning gracenote off and reindexing like you said.
2012 SGM SEL Sedan 303a w/o Nav
Job 1 built 6/2011