+1. Typically sill seal (a thin layer of fiberglass insulation) would be put between the head expander and frame. I'm not a big fan of head expanders in general as they are hard to seal against air leakage, but they are an accepted practice.
As far as the leaking, as the other guys have alluded to, take a look on the exterior of this window. Check the flashing/siding interface on it, and also check for potential problem areas from above as well as WDC mentioned. Post some exterior pics if you don't see anything obvious.
Spray Foam Insulation Air Infiltration
- HomeSealed
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