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That is already in the game. Any province directly at your border, you have a strong claim on, and anything up to 2 more provinces outside your border, you have a weak claim on. Whenever someone (you don't have a "Province-Claiming pact" with) takes a province you have a claim on, you get a grievance (reason for war) - unless their claim is stronger. So, aside from the pact, the only way you don't get a grievance for someone building close to you, is if it is touching their border, but not yours.
Honestly, the grievances from building an actual settlement within like 6 provinces of your territory should be massive. In any even remotely realistic situation, setting up a military outpost anywhere close to anything but an ally would be considered an immediate act of war.
That is not how it works though. If you just expand your city, you expand into territory you have a strong claim on, and as long as you do not yet touch their borders(where they also have a strong claim), they get no grievance. For you to be completely blocked from expanding they would have to build right in your claimed zone, which gives you a grievance first.
Granted, 3 provinces between your border and their outpost is still uncomfortably close, but it does not prevent all expansion... and that is where fabricated grievances come in handy - if you care about justifying your war that is. Or expand to only leave one province space, and wait for them to build the city, so they have to expand into your claims. Though I probably would not want to do this either, and they don't always turn outposts into cities.
Well that could be it. I have only played two of those in total, and one is the succession war, where so far the kings have been too busy killing each other to bother me (this one is still ongoing), though one of them did build an outpost just outside my claimed territory - but to be fair, it is right in the middle between both of our capital cities. So he did not go out of his way to build it next to me. I would have wanted an outpost there as well in his place. Usually I play without those challenge traits, and don't notice this behavior.
Like I said they drop these settlements specifically in locations to box you in so after a few pop upgrades you have to start claiming tiles next to this settlement and generate grievances. It's especially bad if you start near mountains, often they drop their settlements right at the edge of valleys giving you literally no path out.
They definitely go out of their way to do this, sometimes they cross oceans to do it, often they settle on the opposite side of your starting city from their main territory. They are also obnoxious enough to release the city as a vassal once it has served it's purpose, just to basically say "I never wanted this anyway."
It's specifically bad with the map modifiers I mentioned because the AI can do stuff faster than you with their accelerated starts. It's like on turn one they send a hero stack directly at you to start setting up outposts in literally the most inconvenient spots they possibly can as a form of harassment. It's an incredibly "well designed" mechanic that is very effective, but also not fun to play against, and they don't do it to other AIs as far as I have seen, it's just used as a form of player bias.