Progress
One problem solved. Turns out my temp sensor fan switch was bad after all. It also turns out, that the design of the how the auxiliary fan temp sensor switch works is different on MY86,87 vs. 88 and up. Not sure about Gen I but my guess is it is similar to my 86 420SEL.
By the way, I am not saying this information is not available already in this forum. It's just not easy to piece together given the differences between years, engines, etc.
Basically, on Gen II 88 and up, if you unplug the temp sensor switch, the fan will come on high as a default. I assume this is a "safer" setting so if/when the switch fails, it is better to have the fan on and cooling than off and overheating. Plus, you will hear it running all the time and possibly be clued in to the fact that there may be a problem. Prior to 88, if the switch fails, you just don't get any fan action no matter how high the temp goes.
This information is available by looking at the circuit diagram. You can see that the diagrams are different for 86/87 and 88 and up.
I also was finding conflicting information about how the temp sensor, auxiliary fan, AC, and high/low relays all interact. Here is what I found:
1. When you turn on the AC, the low speed fan relay should click passing the current through the fan speed resistor. The AC itself will never turn on the high speed fan.
2. Whether the AC is on or not, the temp sensor switch monitors the coolant temperature. If the temp reaches 105C, the switch kicks on the fan at high speed. The fan will stay on until the gauge in cluster reads somewhere below 90C. I am not saying this is tied to the cluster gauge, in fact it is not, I just used that to monitor the temperature myself.
3. If the high speed fan still cannot cool the engine, and the temp reaches 115C, the temp sensor switch will turn off the AC compressor and you will lose your AC. I believe that is what the third pin/single connector on the temp switch is for. Of course, this is done as a last measure in the event the cooling system cannot keep up.
I replaced my switch yesterday and now it kicks on at 105C.
Of course, this leaves the issue of my engine getting to 105C in the first place. This is not from hard driving but just from at least 20 minutes or so of stop and go traffic. I *think* this is because my main engine fan clutch is bad. Over the past couple weeks with me testing these various components of the fans, I did notice that when my car is heating up in my driveway (not moving) the fan clutch never seems to kick on. Also, when the engine is hot, sometimes at almost 115C (before I fixed the temp sensor) and I rev the engine, the main fan seems to still be in "coast" mode i.e. it does not speed up and roar like I understand should happen. Now, I could be wrong here, but, I am going to go ahead and replace it anyway as it seems like the next easiest/cheapest thing to do. I still have a new t-stat I have not put on yet but that will happen soon enough as well. We'll see what happens after this before I move on to replacing the water pump or rad next. The fan clutch should be here today so I should know by tonight. The temps here are already in the 90's so it won't be hard to test.
Picture below is of the three prong temp sensor switch. Know that if you ever need to order one of these, there are two part numbers because they work differently depending on MY86/87 and 88 and up. This is noted in the EPC. My part number was 0065454524.