[tential]

So is this how XBMC downloads it's fanart or does something else do it by default?

It depends.

If you run AD with "Use Local Files", then AD will download the artwork and write it to the filesystem, then associate the local artwork with your movies.

If you run AD without "Use Local Files" it will not download artwork or write anything to your filesystem, but will associate your movies with remote internet-based artwork.

As far as I can tell in both cases (but certainly the second) this artwork will not be stored in your clients texture cache, so you can either manually cache it by viewing the associated items in the XBMC GUI (a slow and painful process on low powered devices), or pre-load them automatically.

I just set this up but how do I ensure that all of my movies are using 1080p fan art?

Did you try setting the minimum fanart size for movies to 1080 in the AD settings?

I did use that setting actually but since I already have previous artwork set I don't know what to do. It's not as much of a concern anymore because some of the 720p artwork is nicer on the eyes.