How can I better understand iCloud security for 1Password data? My understanding is iCloud uses server-side encryption of customer data. 

I am no expert but what about the data e.g. of an app like 1Password which can syncs very sensitive user data to many devices via iCloud.

Since 1Password purposefully encrypts data before sending it to iCloud, does this mean the data cannot be looked up by Apple employees?
1Password does not use "iCloud" which is a service offering from Apple, by default it uses Dropbox but can also use other cloud solutions. 1Password does not support storing data on Apple's iCloud.

1Password 3 data file sync solutions

About 1Password Encryption


  The slightly longer answer is that your data is encrypted using AES,
  the same state-of-the-art encryption algorithm used as the national
  standard in the United States. 1Password uses 128-bit keys for
  encryption, which means that it would take millions of years for a
  criminal to decrypt your data using a brute force attack.


And more about Agile Keychain Design and encryption

Information about Dropbox and encryption. Keep in mind that Dropbox does not encrypt the files that you store with their service, but they do encrypt the traffic between your computer and their servers at Amazon.

UPDATE 20121217:
I see that the latest version of 1Password does offer the ability to use Apple's iCloud for storing and sharing.

Here is an knowledge base article from Apple on the subject, iCloud: iCloud security and privacy overview. But it does not cover the encryption of non-Apple application data.

Ars has a much better article discussing encryption in iCloud, Apple holds the master decryption key when it comes to iCloud security, privacy

It seems to me that Agilebits has really fallen behind on updating their web site with information about the latest version of 1Password for iOS. It looks like 1Password Pro, which I have been using for awhile now, has been removed from iTunes and the only version available is the new version here. I would guess that a new version for the desktop is also on its way.