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.