According to Apple, “Apple has identified an issue where Unlock with Apple Watch may not work with iPhone 13 devices. You might see “Unable to Communicate with Apple Watch” if you try to unlock your iPhone while wearing a face mask, or you might not be able to set up Unlock with Apple Watch.”
“This issue will be fixed in an upcoming software update. Until the update is available, you can turn off Unlock with Apple Watch and use your passcode to unlock your iPhone 13.”
For those unfamiliar with the feature, this was actually introduced last year during the pandemic where people started wearing masks. As a result, security features like Face ID proved to be more annoying because users could no longer use it while wearing a mask, defeating the purpose of the feature.
However, by enabling Unlock with Apple Watch, as long as the user had their Apple Watch on their wrist and had authenticated themselves, their iPhones could unlock using Face ID even with their mask on. It is a very convenient feature so hopefully Apple won’t take too long to issue a fix.
Keep in mind that this only affects the iPhone 13 and that older compatible iPhones have no issue with it.