Command byte $01 is sent to the Z80 when its program ROM needs to be changed, such as at power-on (switch from onboard SM1 to cart M1 ROM) or when switching the active slot (changing which cart M1 ROM is selected). This command mutes YM2610 audio and jumps to an infinite loop in RAM where it is then safe to switch the Z80 program ROM. The Z80 sends the 68k $01 right before jumping to signal that it is safe to switch. If the $01 byte is never received, "Z80 ERROR" is displayed and the system locks up.
The Z80 doesn't test SM1, its RAM or the YM2610. This error only covers bad 68k/Z80 communication, but if any of those components are bad, it can stop the Z80 from being able to reply which will then cause the error to be displayed.
This board displays this error with no cart inserted since it has no SM1 to control the Z80.