The documentation https://rasterio.readthedocs.io/en/latest/api/rasterio.merge.html says:
"Input files are merged in their listed order using the reverse painter’s algorithm (default) or another method."
And for the available methods predefined by rasterio:
"first: reverse painting
last: paint valid new on top of existing
min: pixel-wise min of existing and new
max: pixel-wise max of existing and new"
You can also write your own function, for example for a median or average of the files.
For your use case of removing clouds, you will probably not get good results from the predefined functions, a min for example would leave you without white clouds but with their dark shadows.