The flag_thumbnail plugin appears to only work when the user is logged in (which seams to ruin the point of the plugin)

The website in question is www.aliciamarshall.co.uk

Any ideas to a solution?

Well, the initial reason d'etre was so the Admin could see easily see when an image/album was protected or not published.

The plugin triggers on classes attached to the images. Currently the print functions attach this class only if someone is logged in. if you search for password_protected you will find where the class is conditionally set. You would have to remove the test for zp_loggedin(). Perhaps you could create a new feature ticket to make this change official. Off hand I cannot think of an issue with including these classes at all times.

(Note, there is a similar class for unpublished images. But of course, no test for logged in is required here since the image will not be offered in the first place then.