+1 on backing up the nut a little. however, I have that cooler, and this parts setup (originally in a 2-gallon MT, then moved to a 5-gallon -- same outlet size) has never leaked, not once:
If 3-gallon batches suit your lifestyle, enjoy it. I want to move up to a 9-gallon Coleman Xtreme so I don't have to sparge, but I'm in no rush. Brewing smaller batches is easier and faster all around for me -- setup, mash, boil, cool, etc. I have a larger kettle and a propane burner, but it introduced overhead and complications. Brew the way you want to brew. You can always move up later--if you want to.
Thanks for the info. The garden hose O-ring and washer set may be just the missing piece I need to get this to work. The best part is - I think I already have this set lying around the house. Will have to try this out tomorrow night.