Drop Test - Issue with mesh size

I am running a drop and test there is (probably a bug) issue which is happening.

If the mesh is extremely coarse, the elements interfere and the resultant interference does not allow the study to run.

If the mesh is coarse, it gives me the following error:

If I refine the mesh further, it gives me the following:


There is no sweet spot where the simulation works fine. I have simplified the assembly and geometry to the maximum extent that I can. I have tried all types of mesh: standard, curvature and blended-curvature.

Please let me know if anyone has seen this issue before and can help me. I can not share the CAD but will try to provide as much information as I can. Thanks.

SolidworksSimulation