Same problem here - received my 42mm Space Gray Sport model yesterday and immediately noticed that it was prompting me for a passcode every time the screen went off - even when worn tightly on my non-tattooed wrist. My wife has the 38mm Sport and it works perfectly. I had her put mine on her wrist and it fails just the same.
Apple Care was helpful and will repair or replace it but, due to the fact the watches are still in short supply - they can't send me a replacement right away. But, of course, they want mine back now! Oh well, I waited two months for it, I guess I can wait some more for one that works properly.
In the meantime, I have turned off "Wrist Detection" and will continue to use Apple Pay with my iPhone. I will see what Activity Tracking issues crop up. I still have not been able to get a definitive answer on exactly what turning off Wrist Detection disables, besides Apple Pay...
Bill