No, not the correct behavior, I would try another cellular modem if you have access to one. Just tried it on my own Z1 with a PanTech UML295 to check the behavior. Without the cellular modem inserted, my WAN port is in the green "Active" state and there is no Cellular state even listed. When I stay on that Appliance Status page and plug in the cellular modem, I see a Cellular status show up under the WAN status, with a green "Connecting" status for maybe 5 to 7 seconds, followed by a green "Ready" status. Then if I pull the cable out of the Internet port, within about 5 seconds the WAN status disappeared and the Cellular status immediately transitioned to "Active" (instead of "Ready"). I then ran some pings and traceroutes, no issues. When reconnecting the WAN link, the WAN status transitioned to a red "Failed" status just for a couple seconds and then at the same time WAN went to "Active" and cellular went to "Ready". Repeated this multiple times.
If you're not seeing very similar behavior, I suspect the cellular modem may be at fault. Double check the supported models https://documentation.meraki.com/MX-Z/Cellular/3G_-_4G_Cellular_Failover and you could also open a case with Meraki Support, they can first make sure there's not a firmware issue on the Z1 that might cause this, and they might have some lower level visibility into the logs with better info about why it's not activating when you remove the primary connection.
