Defect, cyber and fraud risks on the rise in housing construction surge

The rapid expansion of affordable housing across North America has made the construction industry a hub of growth. But experts warn that new pressures are exposing builders and developers to risks that extend well beyond traditional job site hazards.

From construction defects tied to labor shortages to cyberattacks on digitized operations, the boom is creating both opportunities and vulnerabilities that demand sharper risk management from construction clients, according to specialists from The Baldwin Group.

At the nexus of these risks is speed. Eric Brown (pictured on the right) told Insurance Business that affordable housing projects are being built more quickly to meet urgent demand, but these compressed timelines are amplifying the risk of construction defects.

“Anytime you have faster build cycles, you’re going to see more defects,” Brown said. “Add in labor shortages, which means less skilled workers, and it’s a recipe for higher defect rates. The real kicker is that defects often don’t materialize for five or six years, so we’re just beginning to see what this wave of building will produce.”

Shift to prefab construction brings challenges

To offset labor challenges and drive efficiency, developers are increasingly turning to prefabricated housing components. While prefabrication promises safer, more consistent quality, it also shifts risks into new areas.

“Prefabbing is essentially turning construction into a manufacturing process,” said Joseph Charczenko (pictured on the left), partner and regional president at The Baldwin Group.

“That comes with logistical complexities. Insurance has to follow materials from the factory floor to the truck, to the crane, and then to the foundation. And sometimes, once they’re on site, the pieces don’t fit together the way they were intended.”

These logistics stretch internationally, with components sometimes shipped across oceans. “It requires a more sophisticated broker to make sure coverage follows every step,” Brown said. “Prefab shifts the risks. It doesn’t eliminate them.”

Cyber and operational exposures grow amid technology adoption

Affordable housing developers are leaning heavily on new technologies to stay competitive amid rising demand. While robotics, artificial intelligence, and “just-in-time” inventory systems promise efficiency, they also come at a cost and introduce unfamiliar exposures.

“Construction is a low-bid environment,” Charczenko said. “Innovating costs money, and that’s tough when every dollar counts. But without robotics and smarter systems, I don’t know how we’d build at the scale we need to.”

The risk, he said, lies in adopting technology that doesn’t last as long as the buildings themselves.

“You can toss an iPhone after a few years. But when you’re building a $30 million apartment complex, you expect it to last decades. If the tech embedded in it fails, who pays for that?”

As construction firms digitize their operations, cyber threats have become one of the fastest-rising risks in the sector. Payment systems, project data, and tenant information are now prime targets for ransomware and data breaches.

“For over a decade, we’ve told clients about cyber risks,” Brown said. “Only recently has it hit home. We’ve had multiple clients lose access to their systems for days or even weeks because of ransomware. The financial recovery is one thing –if you have insurance – but the business disruption is huge.”

Charczenko agreed: “Most builders now know someone who’s been hit (by a cyber attack). But many small and mid-size firms don’t have the resources to keep up. For them, it can be devastating.”

Alongside digital threats, job site fraud has also spiked. Spoofed vendor invoices, diverted payments, and false injury claims are among the most common schemes, according to The Baldwin Group experts.

He described a client who lost seven figures to a fraudulent payment diversion. “The money was wired and gone in ten minutes,” Charczenko said. “That’s the reality we’re dealing with. The corrective action involves multi-step verification for payments, enhanced site security, and thorough documentation. But it’s a level of sophistication many firms aren’t used to.”

How is the insurance industry responding to evolving construction risks?

These evolving risks are also straining insurers and brokers. Building sufficient limits for construction clients often requires layering coverage across multiple carriers. To get $25 million in limits today, for example, it can “take five, six, even seven insurers,” Brown said.

Underwriters are experimenting with credits for prefabricated construction; however, long-term claims data remain scarce. The insurance market is still testing whether newer methods will reduce defect rates over time.

Despite the challenges, Charczenko and Brown stressed that technological and process innovations remain essential for the construction sector.

“Without advancement in technology and process, the industry goes backward, not forward,” Charczenko said. “We just need to be smart about how risks shift.”

Brown added that proactive risk management can make a difference. Mock OSHA inspections, stronger contract alignment, and tighter safety systems are some of the best practices that they often prescribe to insureds.

As the affordable housing boom accelerates, the sector’s ability to balance efficiency with resilience will determine not only how quickly homes are built but also how long they last and how well insurers, developers, and tenants are protected from the new wave of risks.

“Affordable housing needs speed and efficiency,” said Brown, “but with the right protections in place, you can build safely and sustainably.”