Some steps I took. 1 used the standard white cable supplied with the ipod instead of the Y cable that AB normally recommends.
Once connected there are two ways to view the album art. First, if you are viewing the iPod/iPhone on the main screen, a small version of the album art should appear in the upper right corner.
You can also push the iDrive knob to the right which will bring you to a menu for viewing options on the split screen. From there you select "Entertainment Details". Once a song starts to play, the Artist, Album and Song Title will appear on the right.
My main issue however was that I did not get the songs directly from itunes but rather ripped it off my CD's. Hence the absence of the album art in the actual file, even though I can see the album art in my itunes.
What I did was to go to Google Images website and search for relevant album covers or related images, saved it in a folder on my desktop manually. Then I opened iTunes and select the Song( or multiple songs from the same album) I wished to have art work for. Then Right Click -> Get Info, Double click the Art Work Tab, Point the browse to that very folder where you have saved those images, Choose relevant images and save it.You have artwork for those track. Sync your iPhone and presto. Took some time but it was worth to have those image on the idrive screen.