Hi,
I've seen a few other posts from members indicating that they'd used a similar method in the past and it's now disallowing, i.e. a file that's located in "My Pictures" isn't located on the web, so has no URL for hosting. Technically, it shouldn't work due to that limitation. I think Auctiva has done some updates to the editor to catch problems like this and use of Copy - Paste from Word documents. Note, I see they have a pop-up box now to scrub Word pastes of bad code.
I'd recommend upload of the photos to Auctiva and then use the "Insert An Auctiva Hosted Image" button at lower right on the description section toolbar to insert the image.
Danno