‘Unlock with Apple Watch’ not working with iPhone 13

‘Unlock with Apple Watch’ not working with iPhone 13. It was working fine with iPhone 12. When I try to enable the option, I get an error saying ‘Unable to communicate with Apple Watch’. (Screenshot attached).

it appears several people are experiencing this issue https://appleinsider.com/articles/21/09/24/unlock-with-apple-watch-isnt-working-for-some-iphone-13-owners.

Got on a couple of calls with Apple Support and tried these troubleshooting steps but nothing worked:

• unpaired and paired Watch again
• reset Watch to factory settings and paired again
• reset iPhone 13 to factory settings, restored from backup and paired again with watch
• updated iPhone to iOS 15 (it was already on that version but somehow still showed an update was available).