Leaky window in bathroom and bad wood below it

I do tile work and I have the same kind of bathroom. I also do the same operation for other people.

What you do is take all the wood molding out around the window, not the casing. Take the sill out completely. Now your left with just the window, a "box" around it. Tear out the walls around your tub because there is probably mold there and will jump from stud to stud breeding. Now you can either use Roxul insulation for the back wall or blue foam insulation. Now durock the walls, rap the durock into the window. Where the sill for the window was you want to angle that piece so water will run off. Now tape all the seams with fiberglass mesh tape and thinset mortar. Caulk where the durock meets the window. Wait till that dries. Now you have 2 choices you can use laticrete 9231 waterproofing membrane or red guard waterproofing membrane. I prefer and trust the laticrete. Paint that around the window and where it returns into the window including where the sill was. Paint it twice. When it's dry you tile everything. You can tile where the sill was or put a piece of 1/4"stone there. Wrap the tile into the window all the way around. Use bullnose tile or fabricate a bullnose so it looks like a pro did it. Lay the tile where the sill was first, then tile around the window. You'll never have a problem again.

It's like when you make a niche' for a shower. If the wood is that badly rotted you might just want to replace that when you do this operation since you'll have everything open.

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I would recommend to call a professional to take a look at it for you. Unless you have a lot of experience in this field, I would snot recommend doing this yourself. A contractor should be able to tell you what the problem is and how much it would cost to fix it.

Good Luck