I downloaded a giant directory full of covers last week and have been working my way through them. I love cover versions of classic songs, but only when the cover finds a new angle on the song. So if you're an acoustic vocalist, there's little point covering Cindi Lauper or Tori Amos. Ditto if you're a metal band, don't cover Black Sabbath unless you've got some really new idea.
Interestingly, the best ones I've found so far have been power/glam metal covers. Dungeon (who seem to have been through a Spinal Tap-worthy number of drummers) covering Blondie's Call Me is just brilliant. It's amazing how perfectly the chorus fits in the glam metal style.
Next one I've liked is Helloween covering Abba's Lay All Your Love On Me, which was always a pompous, over-the-top pop tune and so makes an excellent glam metal track.
It's interesting that the glam metal bands seem to understand what kinds of songs they should be plundering as there seem to be a lot of people covering music in their own genre, which is almost always a disaster. Acoustic vocalists, look to completely different genres like metal, thrash and the like. Tori Amos' cover of Smells Like Teen Spirit is a great example. I'm also a huge fan of The Goards' cover of Snoop's Gin and Juice.
So I'm still only about a third of the way through this directory. I'm sure there'll be a few more gems.