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                                                                    EXHIBIT 10.2


                              EMPLOYMENT AGREEMENT





                               SAFECO CORPORATION

                                       AND

                               MICHAEL S. MCGAVICK













                          DATED AS OF JANUARY 26, 2001

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                              EMPLOYMENT AGREEMENT

      This Employment Agreement (this "Agreement"), dated as of January 26, 2001
("Effective Date"), between SAFECO Corporation, a Washington corporation
("SAFECO"), and Michael S. McGavick ("Employee");

      WHEREAS, SAFECO desires to provide for the services and employment of
Employee upon the terms and conditions stated in this Agreement; and

      WHEREAS, Employee desires to perform services for SAFECO upon the terms
and conditions stated in this Agreement;

      NOW, THEREFORE, for and in consideration of the foregoing premises and for
other good and valuable consideration, the sufficiency and receipt of which are
hereby acknowledged, SAFECO and Employee agree as follows:

1.    EMPLOYMENT

      SAFECO will employ Employee and Employee will accept employment by SAFECO
as its President and Chief Executive Officer. Employee will also be a Director
upon appointment by SAFECO's Board of Directors. Employee will have the
authority, subject to SAFECO's Articles of Incorporation and Bylaws, as may be
granted from time to time by the Board of Directors of SAFECO. Employee will
perform the duties and have the responsibilities and authority assigned to the
president in SAFECO's Bylaws, the duties customarily performed by the chief
executive officer of a corporation which is, in all respects, similar to SAFECO
and such other duties as may be assigned from time to time by the Board of
Directors of SAFECO, which relate to the business of SAFECO, its subsidiaries,
or any business ventures in which SAFECO or its subsidiaries may participate.

2.    ATTENTION AND EFFORT

      Employee will devote all of his entire productive time, ability, attention
and effort to SAFECO's business and will skillfully serve its interests during
the term of this Agreement; provided, however, that Employee may devote
reasonable periods of time to (a) engaging in personal investment activities,
(b) serving on the Board of Directors of other corporations, if such service
would not otherwise be prohibited by Section 7 of this Agreement and is approved
pursuant to SAFECO's Policy on Outside Directorships, and (c) engaging in
charitable or community service activities, so long as none of the foregoing
additional activities materially interfere with Employee's duties under this
Agreement and are approved or reported pursuant to SAFECO's Policy on Outside
Directorships.

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3.    COMPENSATION

      During the term of this Agreement, SAFECO agrees to pay or cause to be
paid to Employee, and Employee agrees to accept in exchange for the services
rendered hereunder by him, the following compensation:

      3.1   BASE SALARY

      Employee's compensation shall consist, in part, of an annual base salary
at a rate of at least Eight Hundred Fifty Thousand Dollars ($850,000.00) before
all customary payroll deductions. Such annual base salary shall be paid in
substantially equal installments and at the same intervals as other officers of
SAFECO are paid. This salary may be, but is not required to be, increased from
time-to-time, subject to and in accordance with the annual compensation review
procedures of SAFECO's Compensation Committee, with Employee's first
compensation review anticipated to occur in December 2001, with the first
potential adjustment to salary effective beginning January 1, 2002.

      3.2   BONUSES

            (a) Employee shall be entitled to participate in SAFECO's
non-discretionary cash bonus program and for purposes of that program shall be
deemed to have three years of service effective as of the Effective Date of this
Agreement.

            (b) Employee may also be entitled to receive, in addition to the
base salary and non-discretionary bonus described above, an annual bonus in an
amount to be determined by the Board of Directors of SAFECO or under the Board's
delegated authority by the Compensation Committee of the Board (the
"Committee"), in its or their sole discretion. The goals on which Employee's
discretionary bonus for 2001 will be based shall be discussed and agreed upon by
and among Employee, the Lead Director and the Compensation Committee of the
Board. Employee's target bonus shall be equal to one hundred per cent (100%) of
annual base salary, and his maximum bonus shall be equal to two hundred per cent
(200%) of annual base salary. For 2001, Employee's bonus shall be guaranteed to
be at least the target bonus. For 2002, Employee's bonus shall be guaranteed to
be at least fifty per cent (50%) of the target bonus.

            (c) Because it is anticipated that Employee will be required to
forfeit a calendar year 2000 bonus from his previous employer, Employee is also
entitled to receive, in addition to the base salary and bonuses described above,
a one-time hiring bonus in the amount of Six Hundred Fifty Thousand Dollars
($650,000.00) to be paid by SAFECO within five (5) business days following the
Effective Date; provided that

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Employee shall fully refund this hiring bonus to SAFECO if (i) Employee is not
required to forfeit a calendar year 2000 bonus from his previous employer or
(ii) Employee terminates his employment with SAFECO before December 31, 2001.

      3.3   STOCK OPTIONS

      Employee shall be entitled to receive a stock option to purchase 300,000
shares of SAFECO common stock (the "Initial Option") effective January 26, 2001
with an exercise price equal to the Fair Market Value (as that term is defined
in the SAFECO Long-Term Incentive Plan of 1997 (the "1997 Plan")) of SAFECO
Common Stock on January 26, 2001. The Initial Option shall have a term of ten
years and shall vest 100% on the fifth anniversary of the date of grant. Such
vesting shall be accelerated (i) 100% if Employee is terminated by the Company
without Cause (as defined below) on or prior to the third anniversary of the
Effective Date, and (ii) if Employee's employment terminates for any reason
after the third anniversary of the Effective Date, in a percentage equivalent to
the number of whole months (with February 2001 being the first month) from the
Effective Date to the date of termination divided by 60. The vested portion of
the Initial Option shall remain exercisable until the earlier of one year after
termination of Employee's employment for any reason and the tenth anniversary of
the date of grant. The Initial Option shall be granted under and otherwise
subject to all the terms and conditions of the 1997 Plan and the agreement
evidencing the award.

      Employee shall be entitled to participate in the Company's ongoing stock
option program on the same basis as other executives. Additional stock option
awards to Employee, if any, will be made in the sole discretion of the
Committee; provided that management will recommend to the Committee that
Employee receive a stock option grant with a fair value of $850,000 (i.e.,
determined by Black-Scholes or similar valuation methodology) at the Committee's
May 2001 meeting, and that, if the Company terminates Employee's employment
within three years of the Effective Date for any reason other than Cause (as
defined below), then the vesting of such award shall be accelerated such that
Employee's vested stake is two times his vested stake on the date of such
termination, but no more than 100%.

      3.4   RESTRICTED STOCK RIGHTS

      Because it is anticipated that Employee will be required to forfeit
$560,000 in estimated value of long-term cash bonuses and $697,000 in stock
option value from his previous employer, Employee shall be entitled to receive a
grant of $1,150,000 in value of Restricted Stock Rights (the "RSR Award")
effective on January 26, 2001. The RSR Award shall be subject to forfeiture upon
termination of Employee's employment; provided that the Restricted Stock Award
shall vest and no longer be

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subject to forfeiture in four equal annual installments beginning one year after
the date of grant; and provided, further, that the unvested portion of the
Restricted Stock Award shall become 100% vested upon termination of Employee's
employment by the Company without Cause (as defined below), by reason of
Employee's death or disability, or upon a Change in Control (as defined below).
The RSR Award shall be granted under and otherwise subject to all the terms and
conditions of the 1997 Plan and the agreement evidencing the award.

      Employee shall be entitled to participate in the Company's ongoing
Restricted Stock Rights program on the same basis as other executives.
Additional Restricted Stock Right awards to Employee, if any, will be made in
the sole discretion of the Committee; provided that management shall recommend
to the Committee that Employee receive a Restricted Stock Right award for 2001
with a grant value of $425,000 at the Committee's February 2001 meeting, and
that, if the Company terminates Employee's employment within three years of the
Effective Date for any reason other than Cause (as defined below), then the
vesting of such award shall be accelerated such that Employee's vested stake is
two times his vested stake on the date of such termination, but no more than
100%.

      3.5   PERFORMANCE STOCK RIGHTS

      Employee shall be entitled to participate in the Company's Performance
Stock Rights program on the same basis as other executives. Performance Stock
Right awards to Employee, if any, will be made in the sole discretion of the
Committee; provided that management shall recommend to the Committee that
Employee receive a Performance Stock Right award for the 2001-2003 cycle with a
grant value of $425,000 at the Committee's February 2001 meeting.

      3.6   OTHER EQUITY GRANTS

      Employee shall be entitled to participate in any future equity
compensation programs of the Company on the same basis as other executives;
provided that awards to Employee, if any, under such programs, will be made in
the sole discretion of the Committee.

4.    BENEFITS

      4.1   RETIREMENT AND SAVINGS PLANS

      During Employee's employment with SAFECO, Employee shall be entitled to
participate in all defined contribution plans and defined benefit plans or
plans, including excess benefit or supplemental retirement plans or agreements,
maintained by SAFECO, as now or hereinafter in effect, that are applicable to
SAFECO's

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employees generally or to its executive officers, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans,
programs and arrangements. Benefits payable under such plans shall commence
pursuant to the terms of such plans.

      4.2   OTHER BENEFIT PROGRAMS

      During Employee's employment with SAFECO, Employee will be entitled to
participate, subject to and in accordance with applicable eligibility
requirements, in all other employee benefit plans, programs and arrangements of
SAFECO, as now or hereinafter in effect, that are applicable to the SAFECO's
employees generally or to its executive officers (including, but not limited to,
all SAFECO relocation policies), as the case may be, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans,
programs and arrangements, and subject to Section 4.1. To the extent that there
is a period of employment required for purposes of eligibility or participation
with respect to full benefit coverage under any employee fringe benefit program,
Employee shall be deemed to have met such requirement as of the Effective Date
of this Agreement. SAFECO shall provide to Employee all of the fringe benefits
and perquisites that are available to the SAFECO's employees generally or to its
executive officers, as the case may be, subject to and on a basis consistent
with the terms, conditions and overall administration of such benefits and
perquisites.

      4.3   COUNTRY CLUB MEMBERSHIP

      SAFECO will pay directly or reimburse Employee for initiation fees and
membership dues at one Puget Sound area social or country club that Employee
anticipates using for business entertainment. Employee's club selection is
subject to approval by the Compensation Committee of the Board of Directors of
SAFECO.

      4.4   HOUSING LOAN AND BENEFITS

            (a) SAFECO will provide Employee with a home purchase loan in an
amount up to one and one-half times Employee's base salary. Interest on the loan
will be computed at the lowest non-taxable interest rate, with interest due
during the first two years of the loan deferred and added to the principal.
After the first two years, Employee will pay interest quarterly during the term
of the loan. The principal amount will be due at the earlier of fifteen (15)
years from the date of the loan or one (1) year after the termination of
Employee's employment with SAFECO.

            (b) SAFECO understands that Executive will sell his Illinois house
and purchase a home in the Puget Sound area. If the Illinois house is purchased
under

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SAFECO's relocation program, SAFECO agrees to insure that the price paid for the
house will be no less than its current appraised value. If requested by
Employee, SAFECO will provide a bridge loan for the interim period between
Employee's purchase of a house in the Puget Sound area and the sale of
Employee's Illinois house, with repayment of the bridge loan due upon the
closing of the sale of the Illinois house. If required, SAFECO will also provide
a guarantee of Employee's mortgage obligations on the Illinois house, pending
its sale.

            (c) SAFECO will gross up any income imputed to Employee based on
SAFECO's reimbursement of Employee's house hunting trips to and temporary living
expenses in the Puget Sound area incurred before the closing date of Employee's
purchase of a Puget Sound area house.

      4.5   COMPANY CAR

      Pursuant to its policy for provision of an automobile for its President
and Chief Executive Officer, SAFECO will provide a car for Employee's use and
pay directly or reimburse Employee for maintenance and operation costs.

      4.6   VACATION AND OTHER LEAVES

      Employee shall be entitled to paid vacation and other paid absences,
whether for holidays, illness, or any similar purposes, in accordance with
policies applicable generally to executive officers of SAFECO; provided,
however, that Employee shall be entitled to at least twenty (20) days of paid
vacation per calendar year.

      4.7   AIR TRANSPORTATION

      When Employee requires air travel, SAFECO shall provide Employee with the
fastest and most efficient form of air transport, whether through commercial or
private service. Costs of air transportation for Employee's business travel will
be paid by SAFECO. Employee's personal use of such air transport services will
be provided to Employee at SAFECO's cost.

      4.8   EXPENSES

      Employee shall be entitled to receive reimbursement for all reasonable and
customary expenses incurred by him in performing services under this Agreement,
including all expenses of travel and accommodations while away from his
residence on business or at the request of and in the service of SAFECO;
provided, however, that such expenses are incurred, accounted for and approved
in accordance with the policies and procedures established from time-to-time by
SAFECO.

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      4.9   FINANCIAL COUNSELING AND TAX PREPARATION

      SAFECO shall pay directly or reimburse Employee for financial consulting
and/or tax preparation fees not to exceed in total $10,000 annually.

      4.10  LEGAL FEES

      SAFECO shall pay directly or reimburse Employee for reasonable legal fees
and expenses not to exceed $30,000 incurred by Employee in connection with the
negotiation and preparation of this Agreement and review of the benefits to be
granted hereunder.

5.    TERMINATION

      Employment of Employee pursuant to this Agreement may be terminated as
follows, but in any case, the provisions of Section 7 hereof shall survive the
termination of this Agreement and the termination of Employee's employment
hereunder:

      5.1   BY SAFECO

      With or without Cause (as defined below), SAFECO may terminate the
employment of Employee at any time during the term of employment upon giving
Notice of Termination (as defined below).

      5.2   BY EMPLOYEE

      Employee may terminate his employment at any time, for any reason, upon
giving Notice of Termination.

      5.3   AUTOMATIC TERMINATION

      This Agreement and Employee's employment hereunder shall terminate
automatically upon the death or total disability of Employee. The term "total
disability" as used herein shall mean Employee's inability to perform the duties
set forth in Section 1 hereof for a period of sixty (60) consecutive days or
periods aggregating one hundred five (105) calendar days in any 12-month period
as a result of physical or mental illness, loss of legal capacity or any other
cause beyond Employee's control, unless Employee is granted a leave of absence
by the Board of Directors of SAFECO. Employee and SAFECO hereby acknowledge that
Employee's ability to perform the duties specified in Section 1 is of the
essence of this Agreement. Termination hereunder shall be deemed to be effective
(a) at the end of the calendar

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month in which Employee's death occurs or (b) immediately upon a determination
by the Board of Directors of SAFECO of Employee's total disability, as defined
herein.

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      5.4   NOTICE

      The term "Notice of Termination" shall mean at least thirty (30) days'
written notice of termination of Employee's employment, during which period
Employee's employment and performance of services will continue; provided,
however, that SAFECO may, upon notice to Employee and without reducing
Employee's compensation during such period, excuse Employee from any or all of
his duties during such period. The effective date of the termination of
Employee's employment hereunder shall be the date on which such 30-day period
expires.

6.    TERMINATION PAYMENTS

      In the event of termination of the employment of Employee, all
compensation and benefits set forth in this Agreement shall terminate except as
specifically provided in this Section 6:

      6.1   TERMINATION BY SAFECO

      If SAFECO terminates Employee's employment without Cause prior to the
third anniversary of the Effective Date: (i) Employee shall be entitled to
receive (a) termination payments equal to three years' annual base salary and
target bonus and (b) any unpaid annual base salary which has accrued for
services already performed as of the date termination of Employee's employment
becomes effective; and (ii) if Employee is terminated by SAFECO for Cause,
Employee shall not be entitled to receive any of the foregoing benefits, other
than those set forth in clause (i)(b) above. If SAFECO terminates Employee's
employment without Cause after the third anniversary on or prior to the fifth
anniversary of the Effective Date, Employee shall receive (a) termination
payments equal to three years' annual base salary (at the annual rate then in
effect), and (b) an amount equal to the amount set forth in clause (i)(b) above.
Except as provided above, Employee's rights upon termination of employment will
be governed by SAFECO's standard policy and practice, or as determined by the
Board of Directors or a committee thereof. The termination payments are payable
contingent upon Employee's resignation from SAFECO's Board of Directors and
execution of a waiver and release of claims arising out of his employment and/or
the termination of his employment with SAFECO.

      6.2   TERMINATION BY EMPLOYEE

      In the case of the termination of Employee's employment by Employee,
Employee shall not be entitled to any payments hereunder, other than those set
forth in clauses (i)(b) or (ii)(b) of subsection 6.1 hereof.

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      6.3   PROCEDURES REGARDING TERMINATION FOR CAUSE

      No termination of Employee's employment by SAFECO for Cause shall be
effective unless the provisions of this Section 6.3 shall have been complied
with. Employee shall be given written notice by the Board of Directors of the
intention to terminate him for Cause, such notice (i) to state in detail the
particular circumstances that constitute the grounds on which the proposed
termination for Cause is based and (ii) to be given no later than 60 days after
the Board of Directors first learns of such circumstances. At the sole
discretion of the Board of Directors, Employee may be placed on paid
administrative leave and relieved of all employment responsibilities upon
issuance of the notice. Employee shall have 15 days after receiving such notice
in which to cure such grounds, to the extent such cure is possible. If he fails
to cure such grounds, Employee shall then be entitled to a hearing before the
Board of Directors. Such hearing shall be held within 20 days of his receiving
such notice, provided that he requests such hearing within 15 days of receiving
such notice. If, within five days following such hearing, the Board of Directors
gives written notice to Employee confirming that, in the judgment of at least
two-thirds of the members of the Board of Directors (excluding Employee), Cause
for terminating his employment on the basis set forth in the original notice
exists, his employment with SAFECO shall thereupon be terminated for Cause.

      6.4   TERMINATION IN CONNECTION WITH A CHANGE IN CONTROL

      Contemporaneously with the execution of this Agreement, SAFECO and
Employee shall execute a Change in Control Severance Agreement (the "Change in
Control Agreement"), a true and correct copy of which is attached hereto as
Exhibit A. In circumstances constituting a Change in Control, as defined in the
Change in Control Agreement, Employee's rights upon termination employment will
be governed by the terms of the Change in Control Agreement, and this Section 6
will be null and void.

      6.5   PAYMENT SCHEDULE

      All payments under this Section 6 shall be made to Employee at the same
interval as payments of salary were made to Employee immediately prior to
termination.

      6.6   CAUSE

      Wherever reference is made in this Agreement to termination being with or
without Cause, "Cause" shall include, without limitation, the occurrence of one
or more of the following events:

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            (a) Failure or refusal to carry out the lawful duties of Employee
described in Section 1 of this Agreement or any directions of the Board of
Directors of SAFECO or any committee of the Board, which directions are
reasonably consistent with the duties herein set forth to be performed by
Employee (other than as a result of illness, accident, or other physical or
mental incapacity), provided that (i) a demand for performance of services has
been delivered to Employee in writing by or on behalf of the Board of Directors
of the Company subsequent to the completion of the procedures set forth in
Section 6.3 identifying the manner in which such Board of Directors believes
that Employee has failed to perform and (ii) Employee has thereafter failed to
remedy such failure to perform;

            (b) Violation by Employee of a state or federal criminal law
involving the commission of a crime against SAFECO or a felony involving moral
turpitude or a violation of 18 U.S.C. Section 1033 (unless the action
constituting such violation was taken with the advice of counsel which may
include the general counsel of SAFECO), including the entry of a guilty or nolo
contendere plea;

            (c) Conduct by Employee that constitutes willful gross neglect or
willful gross misconduct in carrying out his duties, resulting, in either case,
in material harm to SAFECO, monetarily or otherwise, unless Employee reasonably
believed in good faith that such act or non-act was in or not opposed to the
best interests of SAFECO; or

            (d) Current use by Employee of illegal substances; deception, fraud,
misrepresentation or dishonesty by Employee; any incident materially
compromising Employee's reputation or ability to represent SAFECO with the
public.

7.    NONCOMPETITION AND NONSOLICITATION

      7.1   APPLICABILITY

      This Section 7 shall survive the termination of Employee's employment with
SAFECO.

      7.2   SCOPE OF COMPETITION

      Employee agrees that he will not, directly or indirectly, during his
employment and for a period of 3 years from the date on which his employment
with SAFECO terminates for any reason, or this Agreement expires, be employed
by, consult with, be a director of or otherwise perform services for, own,
manage, operate, join, control or participate in the ownership, management,
operation or control of or be connected with, in any manner, any Competitor. A
"Competitor" shall include any entity which, directly or indirectly, competes
with SAFECO or produces, markets, distributes or


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otherwise derives benefit from the production, marketing or distribution of
products or services which compete with products then produced or services then
being provided or marketed, by SAFECO or the feasibility for production of which
SAFECO is then actually studying, or which is preparing to market or is
developing products or services that will be in competition with the products or
services then produced or being studied or developed by SAFECO, in each case
within the geographical area of the United States, unless released from such
obligation in writing by SAFECO's Board of Directors. Employee shall be deemed
to be related to or connected with a Competitor if such Competitor is (a) a
partnership in which he is a general or limited partner or employee, (b) a
corporation or association of which he is a shareholder, officer, employee or
director, or (c) a partnership, corporation or association of which he is a
member, consultant or agent; provided, however, that nothing in this Agreement
shall prevent the purchase or ownership by Employee of shares which constitute
less than one percent of the outstanding equity securities of a publicly or
privately held corporation, if Employee had no other relationship with such
corporation.

      7.3   SCOPE OF NONSOLICITATION

      Employee shall not directly or indirectly solicit, influence or entice, or
attempt to solicit, influence or entice, any employee or consultant of SAFECO to
cease his relationship with SAFECO or solicit, influence, entice or in any way
divert any customer, distributor, partner, joint venturer or supplier of SAFECO
to do business or in any way become associated with any Competitor. This Section
7.3 shall apply during the time period and geographical area described in
Section 7.2.

      7.4   ASSIGNMENT OF INTELLECTUAL PROPERTY

      All concepts, designs, machines, devices, uses, processes, technology,
trade secrets, works of authorship, customer lists, plans, embodiments,
inventions, improvements or related work product (collectively "Intellectual
Property") which Employee develops, conceives or first reduces to practice
during the term of his employment hereunder or within one year after the
termination of his employment hereunder or the expiration of this Agreement,
whether working alone or with others, shall be the sole and exclusive property
of SAFECO, together with any and all Intellectual Property rights, including,
without limitation, patent or copyright rights, related thereto, and Employee
hereby assigns to SAFECO all of such Intellectual Property. "Intellectual
Property" shall include only such concepts, designs, machines, devices, uses,
processes, technology, trade secrets, customer lists, plans, embodiments,
inventions, improvements and work product which (a) relate to Employee's
performance of services under this Agreement, to SAFECO's field of business or
to SAFECO's actual or demonstrably anticipated research or development, whether
or

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not developed, conceived or first reduced to practice during normal business
hours or with the use of any equipment, supplies, facilities or trade secret
information or other resource of SAFECO or (b) are developed in whole or in part
on SAFECO's time or developed using SAFECO's equipment, supplies, facilities or
trade secret information, or other resources of SAFECO, whether or not the work
product relates to SAFECO's field of business or SAFECO's actual or demonstrably
anticipated research.

      7.5   DISCLOSURE AND PROTECTION OF INVENTIONS

      Employee shall disclose in writing all concepts, designs, processes,
technology, plans, embodiments, inventions or improvements constituting
Intellectual Property to SAFECO promptly after its or their development. At
SAFECO's request and at SAFECO's expense, Employee will assist SAFECO or its
designee in efforts to protect all rights relating to such Intellectual
Property. Such assistance may include, without limitation, the following: (a)
making application in the United States and in foreign countries for a patent or
copyright on any work products specified by SAFECO; (b) executing documents of
assignment to SAFECO or its designee of all of Employee's right, title and
interest in and to any work product and related intellectual property rights;
and (c) taking such additional action (including, without limitation, the
execution and delivery of documents) to perfect, evidence or vest in SAFECO or
its designee all right, title and interest in and to any Intellectual Property
and any rights related thereto.

      7.6   NONDISCLOSURE; RETURN OF MATERIALS

      During the Term and following termination of Employee's employment with
SAFECO, Employee will not disclose (except as required by his duties to SAFECO)
any concept, design, process, technology, trade secret, customer list, plan,
embodiment, or invention, any other Intellectual Property or any other
confidential information, whether patentable or not, of SAFECO of which Employee
becomes informed or aware during his employment, whether or not developed by
Employee. In the event of the termination of his employment with SAFECO or the
expiration of this Agreement, Employee will return all documents, data and other
materials of whatever nature, including, without limitation, drawings,
specifications, research, reports, embodiments, software and manuals to SAFECO
which pertain to his employment with SAFECO or to any Intellectual Property and
shall not retain or cause or allow any third party to retain photocopies or
other reproductions of the foregoing.

      7.7   EQUITABLE RELIEF

      Employee acknowledges that the provisions of this Section 7 are essential
to SAFECO, that SAFECO would not enter into this Agreement if it did not include
this

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Section 7 and that damages sustained by SAFECO as a result of a breach of this
Section 7 cannot be adequately remedied by damages, and Employee agrees that
SAFECO, notwithstanding any other provision of this Agreement, including,
without limitation, Section 13 hereof, and in addition to any other remedy it
may have under this Agreement or at law, shall be entitled to injunctive and
other equitable relief to prevent or curtail any breach of any provision of this
Agreement, including, without limitation, this Section 7.

      7.8   EFFECT OF VIOLATION

      Employee and SAFECO acknowledge and agree that additional consideration
has been given for Employee entering into this Section 7, such additional
consideration including, without limitation, certain provisions for termination
payments pursuant to Section 6 of this Agreement. Violation by Employee of this
Section 7 shall relieve SAFECO of any obligation it may have to make such
termination payments, but shall not relieve Employee of his obligations, as
required hereunder, not to compete.

      7.9   DEFINITION OF SAFECO

      For purposes of subsection 7.2 and subsection 7.3 hereof, "SAFECO" shall
include all subsidiaries of SAFECO, SAFECO's and any business ventures in which
SAFECO, its subsidiaries may participate.

8.    REPRESENTATIONS AND WARRANTIES

      In order to induce SAFECO to enter into this Agreement, Employee
represents and warrants to SAFECO as follows:

      8.1   NO VIOLATION OF OTHER AGREEMENTS

      Neither the execution nor the performance of this Agreement by Employee
will violate or conflict in any way with any other agreement by which Employee
may be bound, or with any other duties imposed upon Employee by corporate or
other statutory or common law.

      8.2   PATENTS, ETC.

      Employee has prepared and attached hereto as Schedule 1 a list of all
inventions, patent applications and patents made or conceived by Executive prior
to the date hereof, which are subject to prior agreement or which Employee
desires to exclude from this Agreement, or, if no such list is attached,
Employee hereby

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represents and warrants to SAFECO that there are no such inventions, patent
applications or patents.

      9.    INDEMNIFICATION

      Employee shall be indemnified by SAFECO to the extent permitted by
applicable law and as provided by Article XII of SAFECO's Bylaws.

      10.   FORM OF NOTICE

      All notices given hereunder shall be given in writing, shall specifically
refer to this Agreement and shall be personally delivered or sent by telecopy or
other electronic facsimile transmission or by registered or certified mail,
return receipt requested, at the address set forth below or at such other
address as may hereafter be designated by notice given in compliance with the
terms hereof:

       If to Employee: Michael S. McGavick
                       [such address as may appear in the personnel
                       records of SAFECO or such other address as
                       Employee may specify in writing]

       If to SAFECO:   Secretary
                       SAFECO Corporation
                       SAFECO Plaza
                       Seattle, WA 98185

       Copy to:        General Counsel
                       SAFECO Corporation
                       SAFECO Plaza
                       Seattle, Washington 98185

      If notice is mailed, such notice shall be effective upon mailing, or if
notice is personally delivered or sent by telecopy or other electronic facsimile
transmission, it shall be effective upon receipt.

11.   ASSIGNMENT

      This Agreement is personal to Employee and shall not be assignable by
Employee. Subject to the provisions of Section 6.5 and Section 6.6 of this
Agreement, SAFECO may assign its rights hereunder to (a) any corporation
resulting from any merger, consolidation or other reorganization to which SAFECO
is a party or (b) any corporation, partnership, association or other person to
which SAFECO may transfer all or substantially all of the assets and business of
SAFECO existing at such time. All of the terms and provisions of this Agreement
shall be binding upon and shall

                                      -15-
<PAGE>   17

inure to the benefit of and be enforceable by the parties hereto and their
respective successors and permitted assigns.

12.   WAIVERS

      No delay or failure by either party in exercising, protecting or enforcing
any of its or his rights, titles, interests or remedies under this Agreement,
and no course of dealing or performance with respect thereto, shall constitute a
waiver. The express waiver by a party of any right, title, interest or remedy in
a particular instance or circumstance shall not constitute a waiver thereof in
any other instance or circumstance. All rights and remedies shall be cumulative
and not exclusive of any other rights or remedies.

13.   ARBITRATION

      Subject to the provisions of Section 7.7 of this Agreement, any
controversies or claims arising out of or relating to this Agreement shall be
fully and finally settled by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in effect (the
"AAA Rules"), conducted by one arbitrator either mutually agreed upon by SAFECO
and Employee or chosen in accordance with the AAA Rules, except that the parties
thereto shall have any right to discovery as would be permitted by the Federal
Rules of Civil Procedure for a period of 90 days following the commencement of
such arbitration and the arbitrator thereof shall resolve any dispute which
arises in connection with such discovery. The prevailing party shall be entitled
to costs, expenses and reasonable attorneys' fees, and judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof.

14.   AMENDMENTS IN WRITING

      No amendment, modification, waiver, termination or discharge of any
provision of this Agreement, nor consent to any departure therefrom by either
party, shall in any event be effective unless the same shall be in writing,
specifically identifying this Agreement and the provision intended to be
amended, modified, waived, terminated or discharged and signed by SAFECO and
Employee, and each such amendment, modification, waiver, termination or
discharge shall be effective only in the specific instance and for the specific
purpose for which given. No provision of this Agreement shall be varied,
contradicted or explained by any oral agreement, course of dealing or
performance or any other matter not set forth in an agreement in writing and
signed by SAFECO and Employee.

15.   APPLICABLE LAW

                                      -16-
<PAGE>   18

      This Agreement shall in all respects, including all matters of
construction, validity and performance, be governed by, and construed and
enforced in accordance with, the laws of the state of Washington, without regard
to any rules governing conflicts of laws.

16.   SEVERABILITY

      If any provision of this Agreement shall be held invalid, illegal or
unenforceable in any jurisdiction, for any reason, including, without
limitation, the duration of such provision, its geographical scope or the extent
of the activities prohibited or required by it, then, to the full extent
permitted by law (a) all other provisions hereof shall remain in full force and
effect in such jurisdiction and shall be liberally construed in order to carry
out the intent of the parties hereto as nearly as may be possible, (b) such
invalidity, illegality or unenforceability shall not affect the validity,
legality or enforceability of any other provision hereof, and (c) any court or
arbitrator having jurisdiction thereover shall have the power to reform such
provision to the extent necessary for such provision to be enforceable under
applicable law.

17.   HEADINGS

      All headings used are for convenience only and shall not in any way affect
the construction of, or be taken into consideration in interpreting, this
Agreement.

18.   COUNTERPARTS

      This Agreement, and any amendment or modification entered into pursuant to
Section 14 hereof, may be executed in any number of counterparts, each of which
counterparts, when so executed and delivered, shall be deemed to be an original
and all of which counterparts, taken together, shall constitute one and the same
instrument.

19.   ENTIRE AGREEMENT

      This Agreement on and as of the date hereof constitutes the entire
agreement between SAFECO and Employee with respect to the subject matter hereof
and all prior or contemporaneous oral or written communications, understandings
or agreements between SAFECO and Employee with respect to such subject matter
are hereby superseded and nullified in their entireties.

                                      -17-
<PAGE>   19

IN WITNESS WHEREOF, the parties have executed and entered into this Agreement on
the date set forth above.


                                        ----------------------------------------
                                        Michael S. McGavick


                                        SAFECO CORPORATION

                                        By
                                           -------------------------------------
                                           William G. Reed, Jr.
                                           Chairman of the Board of Directors

                                      -18-
<PAGE>   20

                                   SCHEDULE 1

                                      None.

<PAGE>   21

                                    EXHIBIT A

                                CHANGE IN CONTROL
                               SEVERANCE AGREEMENT


THIS AGREEMENT, effective January 26, 2001, is made by and between SAFECO
Corporation, a Washington corporation ("SAFECO"), and Michael S. McGavick (the
"Executive").

WHEREAS, SAFECO (together with its subsidiaries, collectively, the "Company"),
considers it essential to the best interests of its stockholders to foster the
continued employment of key management personnel; and

WHEREAS, SAFECO recognizes that, as is the case with many publicly held
corporations, the possibility of a Change in Control exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and its stockholders; and

WHEREAS, SAFECO has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
Company's management, including the Executive, to their assigned duties without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a Change in Control;

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein
contained, the Company and the Executive agree as follows:

1. Defined Terms. The definitions of capitalized terms used in this Agreement
are provided in Section 15.

2. Term of Agreement. The Term of this Agreement shall commence on the date
hereof and shall continue in effect until the earlier of (i) the date it is
terminated by written agreement between the Company and the Executive and (ii)
seventh anniversary of a Change in Control.

3. Company's Covenants Summarized. In order to induce the Executive to remain in
the employ of the Company and in consideration of the Executive's covenants
stated in Section 4, the Company agrees, under the conditions described herein,
to pay the Executive the Severance Payments and the other payments and benefits
described herein. Except as provided in Section 5.1, Section 5.4, Section
6.2(A), and Section 9.1, no amount or benefit shall be payable under this
Agreement unless there shall have been a termination of the Executive's
employment with the Company following a Change in Control and during the Term.
This Agreement shall not be construed as creating an express or implied contract
of employment and, except as otherwise agreed in writing between the Executive
and the Company, the Executive shall not have any right to be retained in the
employ of the Company.

4. The Executive's Covenants. The Executive agrees that, subject to the terms
and conditions of this Agreement, in the event of a Potential Change in Control
during the Term, the Executive will remain in the employ of the Company until
the earliest of (i) a date which is six

<PAGE>   22

(6) months from the date of such Potential Change of Control, (ii) the date of a
Change in Control, (iii) the date of termination by the Executive of the
Executive's employment for Good Reason or by reason of death, Disability or
Retirement, or (iv) the termination by the Company of the Executive's employment
for any reason.

5.    Compensation Other Than Severance Payments.

      5.1 Salary During Incapacity or Illness. Following a Change in Control and
during the Term, during any period that the Executive fails to perform the
Executive's fulltime duties with the Company as a result of incapacity due to
physical or mental illness, the Company shall pay the Executive's full salary to
the Executive at the rate in effect at the commencement of any such period,
together with all compensation and benefits payable to the Executive under the
terms of any applicable compensation or benefit plan, program or arrangement
maintained by the Company during such period, until the Executive's employment
is terminated by the Company for Disability.

      5.2 Salary During Term. If the Executive's employment shall be terminated
for any reason following a Change in Control and during the Term, the Company
shall pay the Executive's full salary to the Executive through the Date of
Termination at the rate in effect at the time the Notice of Termination is
given, together with all compensation and benefits payable to the Executive
through the Date of Termination under the terms of the Company's applicable
compensation and benefit plans, programs or arrangements.

      5.3 Post-Termination Compensation and Benefits. If the Executive's
employment shall be terminated for any reason following a Change in Control and
during the Term, the Company shall pay to the Executive the normal
post-termination compensation and benefits as such payments become due. Such
post-termination compensation and benefits shall be determined under, and paid
in accordance with, the Company's applicable retirement, insurance and other
compensation or benefit plans, programs and arrangements.

      5.4 Incentive Awards.

      (A) Stock Options and SARs. Immediately prior to the Change in Control,
all awards of stock options and stock appreciation rights ("SARs") previously
granted to the Executive shall become fully vested and exercisable. The phrase
"immediately prior to the Change in Control" shall be understood to mean
sufficiently in advance of a Change in Control to permit the Executive to take
all steps reasonably necessary to exercise all options and SARs and to deal with
the shares of stock underlying the awards of stock options and SARs so that such
shares may be treated in the same manner as the shares of stock of other
shareholders in connection with the Change in Control.

      (B) Performance Stock Rights. To the extent deemed earned, each
outstanding performance stock right ("PSR") previously granted to the Executive
shall become immediately payable in cash upon a Change in Control, and the
remainder of each outstanding PSR shall be canceled for no value. All
outstanding PSRs shall be deemed to have been earned to the extent of the
greater of:

                                       2
<PAGE>   23

      (i)   the number of shares determined by the Committee based on the extent
            to which the performance goals specified in the PSR award agreement
            have been achieved during the portion of the performance period
            ending on the last day of the last fiscal quarter of the Company
            ending on or before the date of the Change in Control, and

      (ii)  the number of shares equal to the product of the target shares
            identified in the PSR award agreement multiplied by a fraction with
            a numerator equal to the whole number of calendar months beginning
            with the month in which the PSR was granted and ending on the date
            of the Change in Control and a denominator equal to the whole number
            of calendar months in the entire performance period covered by the
            PSR award agreement and less any shares previously issued under the
            PSR award agreement.

      (C) Restricted Stock Rights. All restrictions with respect to restricted
stock rights ("RSRs") shall lapse upon a change in Control, and all outstanding
RSRs of the Executive shall be immediately settled by a cash payment.

      (D) Other Incentive Awards. All other restrictions with respect to
outstanding incentive awards of the Executive not described in subsections (A)
through (C) of this Section 5.4 shall lapse upon a Change in Control, and such
awards shall be fully vested and nonforfeitable.

      (E) Fair Market Value. For purposes of this Section 5.4, with respect to
determining the cash equivalent value of an RSR or PSR or the spread payable
upon exercise of an SAR, the fair market value of a share of the Company's stock
shall be deemed to equal the greater of (i) the fair market value of a share of
stock as of the date on which a Change in Control occurs and (ii) the highest
price of a share of stock which is paid or offered to be paid, by any person or
entity, in connection with any transaction which constitutes a Change in
Control.

      5.5 Deferral Election. The Executive may elect to defer all or a portion
of the payments that are to be made to the Executive under Section 6.1(A) and
Section 6.2. The Executive may exercise such election by delivering a notice of
election (in accordance with Section 10) prior to the occurrence of the Change
in Control, which notice shall state the portion of such payments that is to be
deferred (expressed as a dollar amount or as a percentage ("the Deferred
Benefit")), the date the payment of the Deferred Benefit shall commence ("the
Deferred Benefit Commencement Date"), and the number of equal consecutive
monthly installments (not to exceed 120) that the Deferred Benefit is to be paid
in. In no event shall the Deferred Benefit Commencement Date be subsequent to
the first day of January of the year immediately following the Executive's
sixty-fifth birthday. In the event such an election is made:

      (A) The amount that would have otherwise been paid under the provisions of
Section 6.1(A) and Section 6.2 shall be reduced by an amount equal to the
Deferred Benefit.

      (B) The Deferred Benefit, together with simple interest calculated at an
annual rate of

                                       3
<PAGE>   24

ten percent (10%) on the unpaid balance of the Deferred Benefit from the date
that payment of the Deferred Benefit would have otherwise been made, shall be
paid in the number of equal consecutive monthly installments selected by the
Executive, with the first such installment being made on the Deferred Benefit
Commencement Date and a subsequent payment being made on the first day of each
month thereafter.

      (C) If the Executive dies prior to receiving the full amount of the
Deferred Benefit, the Company shall continue to pay the Deferred Benefit to the
estate of the Executive in the same manner as the Deferred Benefit would have
been paid to the Executive if the Executive had not died.

      (D) The Deferred Benefit shall in no event be set aside or deposited to a
separate account or fund, and the rights of the Executive to the Deferred
Benefit shall not be greater than the rights of any other general, unsecured
creditor of the Company.

      (E) The Executive, the Executive's spouse, and any other person or entity
claiming through or under the Executive shall not have any power or authority to
commute, encumber, or dispose of any right to receive payment of the Deferred
Benefit, all of which payments are expressly declared to be non-assignable. In
the event of any attempt at assignment or other disposition, the Company shall
have no further liability to pay the Deferred Benefit. The Deferred Benefit
provided for in this Agreement shall not be subject to seizure for the payment
of any debts, judgments, alimony, separate maintenance or child support, or be
reached or transferred by operation of law, or in the event of bankruptcy,
insolvency or otherwise.

6.    Severance Payments.

      6.1 Severance Payments Enumerated. The Company shall pay the Executive the
payments described in this Section 6.1 (the "Severance Payments") upon the
termination of the Executive's employment following a Change in Control and
during the Term, in addition to any payments and benefits to which the Executive
is then entitled under Section 5, unless such termination is (i) by the Company
for Cause, (ii) by reason of death, Disability or Retirement, or (iii) by the
Executive without Good Reason. Additionally, during the one-month period
beginning with the first day of the month immediately following the first
anniversary of the Change in Control, the Executive may voluntarily terminate
his employment for any reason and, upon such termination, the Company shall pay
the Executive the Severance Payments and the Gross-Up Payment, in addition to
any payments and benefits to which the Executive is then entitled under Section
5. For purposes of this Agreement, the Executive's employment shall be deemed to
have been terminated following a Change in Control by the Company without Cause
or by the Executive with Good Reason, if (i) the Executive's employment is
terminated by the Company without Cause prior to a Change in Control and such
termination was at the request or direction of a Person who has entered into an
agreement with the Company the consummation of which would constitute a Change
in Control, (ii) the Executive terminates his employment with Good Reason prior
to a Change in Control and the circumstance or event which constitutes Good
Reason occurs at the request or direction of such Person, or (iii) the
Executive's employment is terminated by the Company without Cause prior to a
Change in Control and the Executive reasonably demonstrates that such
termination is otherwise in connection with or in anticipation


                                       4
<PAGE>   25

of a Change in Control.

      (A) In lieu of any further salary payments to the Executive for periods
subsequent to the Date of Termination and in lieu of any severance benefit
otherwise payable to the Executive, the Company shall pay to the Executive a
lump sum severance payment, in cash, equal to three (or, if less, the number of
years, rounded to the nearest hundredth of a year, remaining until December 31
of the year in which the Executive attains age 65) times the higher of the
Executive's annual base salary in effect immediately prior to the occurrence of
the event or circumstance upon which the Notice of Termination is based and the
Executive's base salary in effect immediately prior to Date of Termination.

      (B) For the thirty-six (36) month period immediately following the Date of
Termination or, if shorter, for the period commencing immediately following the
Date of Termination and ending on December 31 of the year in which the Executive
attains age 65 (such applicable period, the "Severance Period"), the Company
shall arrange to provide the Executive with life, disability, accident and
health insurance benefits substantially similar to those which the Executive is
receiving immediately prior to the Date of Termination; provided, however, that,
unless the Executive consents to a different method (after taking into account
the effect of such method on the calculation of "parachute payments" pursuant to
Section 6.2), such health insurance benefits shall be provided through a
third-party insurer. Benefits otherwise receivable by the Executive pursuant to
this Section 6.1 (B) shall be reduced to the extent comparable benefits are
actually received by or made available to the Executive during the Severance
Period (and any such benefits actually received by or made available to the
Executive shall be reported to the Company by the Executive).

      (C) Notwithstanding any provision of any annual or long-term incentive
plan to the contrary, the Company shall pay to the Executive a lump sum amount,
in cash, equal to the sum of (i) any incentive compensation which has been
allocated or awarded to the Executive for a completed year or other measuring
period preceding the Date of Termination under any such plan and which, as of
the Date of Termination, is contingent only upon the continued employment of the
Executive to a subsequent date, and (ii) a pro rata portion to the Date of
Termination of the aggregate value of all contingent incentive compensation
awards to the Executive for all then uncompleted periods under any such plan,
calculated as to each such award by multiplying the award that the Executive
would have earned on the last day of the performance award period, assuming the
achievement, at the level that would produce the maximum award, of the
individual and corporate performance goals established with respect to such
award, by the fraction obtained by dividing the number of full months and any
fractional portion of a month during such performance award period through the
Date of Termination by the total number of months contained in such performance
award period.

      6.2   "Gross-Up Payment."

      (A) Whether or not the Executive becomes entitled to the Severance
Payments, if any of the payments or benefits received or to be received by the
Executive in connection with a Change in Control or the Executive's termination
of employment (whether pursuant to the terms of this Agreement or any other
plan, arrangement or agreement with the Company, any Person

                                       5
<PAGE>   26

whose actions result in a Change in Control or any Person affiliated with the
Company or such Person) (such payments or benefits, excluding the Gross-Up
Payment, being hereinafter referred to as the "Total Payments") will be subject
to the Excise Tax, the Company shall pay to the Executive an additional amount
(the "Gross-Up Payment") such that the net amount retained by the Executive,
after deduction of any Excise Tax on the Total Payments and any federal, state
and local income and employment taxes and Excise Tax upon the Gross-Up payment,
shall be equal to the Total Payments.

      (B) For purposes of determining whether any of the Total Payments will be
subject to the Excise Tax and the amount of such Excise Tax, (i) all of the
Total Payments shall be treated as "parachute payments" (within the meaning of
section 280G(b)(2) of the Code) unless, in the opinion of tax counsel selected
by the accounting firm which was, immediately prior to the Change in Control,
the Company's independent accountant (the "Accountant") and which tax counsel is
reasonably acceptable to the Executive ("Tax Counsel"), such payments or
benefits (in whole or in part) do not constitute parachute payments, including
by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute
payments" within the meaning of section 280G(b)(1) of the Code shall be treated
as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess
parachute payments (in whole or in part) represent reasonable compensation for
services actually rendered (within the meaning of section 280G(b)(4)(B) of the
Code) in excess of the Base Amount allocable to such reasonable compensation, or
are otherwise not subject to the Excise Tax, and (iii) the value of any noncash
benefits or any deferred payment or benefit shall be determined by the
Accountant in accordance with the principles of sections 280G(d)(3) and (4) of
the Code. For purposes of determining the amount of the Gross-Up Payment, the
Executive shall be deemed to pay federal income tax at the highest marginal rate
of federal income taxation in the calendar year in which the Gross-Up Payment is
to be made and state and local income taxes at the highest marginal rate of
taxation in the state and locality of the Executive's residence on the Date of
Termination (or if there is no Date of Termination, then the date on which the
Gross-Up Payment is calculated for purposes of this Section 6.2), net of the
maximum reduction in federal income taxes which could be obtained from deduction
of such state and local taxes.

      (C) In the event that the Excise Tax is finally determined to be less than
the amount taken into account hereunder in calculating the Gross-Up Payment, the
Executive shall repay to the Company, at the time that the amount of such
reduction in Excise Tax is finally determined, the portion of the Gross-Up
Payment attributable to such reduction (plus that portion of the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income and
employment taxes imposed on the Gross-Up Payment being repaid by the Executive
to the extent that such repayment results in a reduction in Excise Tax and/or a
federal, state or local income or employment tax deduction) plus interest on the
amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B)
of the Code. In the event that the Excise Tax is determined to exceed the amount
taken into account hereunder in calculating the Gross-Up Payment (including by
reason of any payment the existence or amount of which cannot be determined at
the time of the Gross-Up Payment), the Company shall make an additional Gross-Up
Payment in respect of such excess (plus any interest, penalties or additions
payable by the Executive with respect to such excess) at the time that the
amount of such excess is finally determined. The Executive and the Company shall
each reasonably cooperate with the other in connection with any

                                       6
<PAGE>   27

administrative or judicial proceedings concerning the existence or amount of
liability for Excise Tax with respect to the Total Payments.

      6.3 Severance Payments Pay Date. The payments provided in subsections (A)
and (C) of Section 6.1 and in Section 6.2 shall be made not later than the fifth
day following the Date of Termination; provided, however, that if the amounts of
such payments cannot be finally determined on or before such day, the Company
shall pay to the Executive on such day an estimate, as determined in good faith
by the Executive or, in the case of payments under Section 6.2, in accordance
with Section 6.2, of the minimum amount of such payments to which the Executive
is clearly entitled and shall pay the remainder of such payments (together with
interest on the unpaid remainder (or on all such payments to the extent the
Company fails to make such payments when due) at 120% of the rate provided in
section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be
determined but in no event later than the thirtieth (30th) day after the Date of
Termination. In the event that the amount of the estimated payments exceeds the
amount subsequently determined to have been due, such excess shall constitute a
loan by the Company to the Executive, payable on the fifth (5th) business day
after demand by the Company (together with interest at 120% of the rate provided
in section 1274(b)(2)(B) of the Code). At the time that payments are made under
this Section, the Company shall provide the Executive with a written statement
setting forth the manner in which such payments were calculated and the basis
for such calculations including, without limitation, any opinions or other
advice the Company has received from Tax Counsel, the Accountant or other
advisors or consultants (and any such opinions or advice which are in writing
shall be attached to the statement).

      6.4 Executive's Legal Fees. The Company also shall pay to the Executive
all legal fees and expenses incurred by the Executive in disputing in good faith
any issue hereunder relating to the termination of the Executive's employment,
in seeking in good faith to obtain or enforce any benefit or right provided by
this Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment or
benefit provided hereunder. Such payments shall be made within five (5) business
days after delivery of the Executive's written requests for payment accompanied
with such evidence of fees and expenses incurred as the Company reasonably may
require.

7.    Termination Procedures and Compensation During Dispute.

      7.1 Notice of Termination. After a Change in Control and during the Term,
any purported termination of the Executive's employment (other than by reason of
death) shall be communicated by written Notice of Termination from one party
hereto to the other party hereto in accordance with Section 10. For purposes of
this Agreement, a "Notice of Termination" shall mean a notice which shall
indicate the specific termination provision in this Agreement relied upon and
shall state in reasonable detail the facts and circumstances claimed to provide
a basis for termination of the Executive's employment under the provision so
indicated. Further, a Notice of Termination for Cause is required to include a
copy of a resolution duly adopted by the affirmative vote of not less than
three-quarters (3/4) of the entire membership of the Board at a meeting of the
Board which was called and held for the purpose of considering such termination
(after reasonable notice to the Executive and an opportunity for the Executive,
together with the Executive's counsel, to be heard before the Board) finding
that, in the good faith opinion of the

                                       7
<PAGE>   28

Board, the Executive was guilty of conduct stated in clause (i) or (ii) of the
definition of Cause herein, and specifying the particulars thereof in detail.

      7.2 Date of Termination. "Date of Termination," with respect to any
purported termination of the Executive's employment after a Change in Control
and during the Term, shall mean (i) if the Executive's employment is terminated
for Disability, thirty (30) days after Notice of Termination is given (provided
that the Executive shall not have returned to the full-time performance of the
Executive's duties during such thirty (30) day period), and (ii) if the
Executive's employment is terminated for any other reason, the date specified in
the Notice of Termination (which, in the case of a termination by the Company,
shall not be less than thirty (30) days (except in the case of a termination for
Cause) and, in the case of a termination by the Executive, shall not be less
than fifteen (15) days nor more than sixty (60) days, respectively, from the
date such Notice of Termination is given).

      7.3 Dispute Concerning Termination. If within fifteen (15) days after any
Notice of Termination is given, or, if later, prior to the Date of Termination
(as determined without regard to this Section 7.3), the party receiving such
Notice of Termination notifies the other party that a dispute exists concerning
the termination, the Date of Termination shall be extended until the earlier of
(i) the date on which the Term ends or (ii) the date on which the dispute is
finally resolved, either by mutual written agreement of the parties or by a
final judgment, order or decree of an arbitrator or a court of competent
jurisdiction (which is not appealable or with respect to which the time for
appeal therefrom has expired and no appeal has been perfected); provided,
however, that the Date of Termination shall be extended by a notice of dispute
given by the Executive only if such notice is given in good faith and the
Executive pursues the resolution of such dispute with reasonable diligence.

      7.4 Compensation During Dispute. If a purported termination occurs
following a Change in Control and during the Term and the Date of Termination is
extended in accordance with Section 7.3, the Company shall continue to pay the
Executive the full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, salary) and continue the
Executive as a participant in all compensation, benefit and insurance plans in
which the Executive was participating when the notice giving rise to the dispute
was given, until the Date of Termination, as determined in accordance with
Section 7.3. Amounts paid under this Section 7.4 are in addition to all other
amounts due under this Agreement (other than those due under Section 5.2) and
shall not be offset against or reduce any other amounts due under this
Agreement.

8.    No Mitigation. The Company agrees that, if the Executive's employment with
the Company terminates during the Term, the Executive is not required to seek
other employment or to attempt in any way to reduce any amounts payable to the
Executive by the Company pursuant to Section 6 or Section 7.4. Further, the
amount of any payment or benefit provided for in this Agreement (other than
Section 6.1(B)) shall not be reduced by any compensation earned by the Executive
as the result of employment by another employer, by retirement benefits, by
offset against any amount claimed to be owed by the Executive to the Company, or
otherwise.

9.    Successors; Binding Agreement.

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<PAGE>   29

      9.1 SAFECO Successors. In addition to any obligations imposed by law upon
any successor to SAFECO, SAFECO will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of SAFECO to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that SAFECO would be required to perform it if no such succession had taken
place. Failure of SAFECO to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle the Executive to compensation from the Company in the same amount
and on the same terms as the Executive would be entitled to hereunder if the
Executive were to terminate the Executive's employment for Good Reason after a
Change in Control, except that, for purposes of implementing the foregoing, the
date on which any such succession becomes effective shall be deemed the Date of
Termination.

      9.2 Executive's Successors. This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive shall die while any amount would still be payable to
the Executive hereunder (other than amounts which, by their terms, terminate
upon the death of the Executive) if the Executive had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the executors, personal representatives or
administrators of the Executive's estate.

10.   Notices. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed, if to the
Executive, to the address inserted below the Executive's signature on the final
page and, if to the Company, to the address stated below, or to such other
address as either party may have furnished to the other in writing in accordance
herewith, except that notice of a change of address shall be effective only upon
actual receipt:

      To the Company:

      SAFECO Corporation
      SAFECO Plaza
      Seattle, WA 98185
      Attention: Chief Executive Officer

11.   Miscellaneous. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by the Executive and an officer of SAFECO. No waiver by either party
hereto at any time of any breach by the other party hereto of, or of any lack of
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. This Agreement
supersedes any other agreements or representations, oral or otherwise, express
or implied, with respect to its subject matter which have been made by either
party. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of

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<PAGE>   30

Washington. All references to sections of the Exchange Act or the Code shall be
deemed also to refer to any successor provisions to such sections. Any payments
provided for hereunder shall be paid net of any applicable withholding required
under federal, state or local law and any additional withholding to which the
Executive has agreed. The obligations of the Company and the Executive under
this Agreement which by their nature may require either partial or total
performance after the expiration of the Term (including, without limitation,
those under Sections 6 and 7) shall survive such expiration.

12.   Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.

13.   Counterparts. This Agreement may be executed in several counterparts, each
of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.

14.   Settlement of Disputes; Arbitration.

      (A) All claims by the Executive for benefits under this Agreement shall be
directed to and determined by the Committee and shall be in writing. Any denial
by the Committee of a claim for benefits under this Agreement shall be delivered
to the Executive in writing and shall state the specific reasons for the denial
and the specific provisions of this Agreement relied upon. The Committee shall
afford a reasonable opportunity to the Executive for a review of the decision
denying a claim and shall further allow the Executive to appeal to the Committee
a decision of the Committee within sixty (60) days after notification by the
Committee that the Executive's claim has been denied.

      (B) Any further dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration in Seattle,
Washington in accordance with the rules of the American Arbitration Association
then in effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction. Notwithstanding any provision of this Agreement to the
contrary, the Executive shall be entitled to seek specific performance of the
Executive's right to be paid until the Date of Termination during the pendency
of any dispute or controversy arising under or in connection with this
Agreement.

15.   Definitions. For purposes of this Agreement, the following terms shall
have the meanings indicated below:

      (A) "Accountant" shall have the meaning stated in Section 6.2.

      (B) "Affiliate" shall have the meaning stated in Rule 12b-2 promulgated
under Section 12 of the Exchange Act.

      (C) "Base Amount" shall have the meaning stated in section 280G(b)(3) of
the Code.

      (D) "Beneficial Owner" shall have the meaning stated in Rule 13d-3 under
the

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<PAGE>   31

Exchange Act.

      (E) "Board" shall mean the Board of Directors of SAFECO.

      (F) "Cause" for termination by the Company of the Executive's employment
shall mean (i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from the Executive's incapacity due to physical or mental
illness or any such actual or anticipated failure after the issuance of a Notice
of Termination for Good Reason by the Executive pursuant to Section 7.1) after a
written demand for substantial performance is delivered to the Executive by the
Board, which demand specifically identifies the manner in which the Board
believes that the Executive has not substantially performed the Executive's
duties, or (ii) the willful engaging by the Executive in conduct which is
demonstrably and materially injurious to the Company or its subsidiaries,
monetarily or otherwise. For purposes of clauses (i) and (ii) of this
definition, (x) no act, or failure to act, on the Executive's part shall be
deemed "willful" unless done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that the Executive's act, or failure to
act, was in the best interest of the Company and (y) in the event of a dispute
concerning the application of this provision, no claim by the Company that Cause
exists shall be given effect unless the Company establishes to the Committee by
clear and convincing evidence that Cause exists.

      (G) A "Change in Control" shall be deemed to have occurred if the event
stated in any one of the following paragraphs shall have occurred:

      (i) any Person is or becomes the Beneficial Owner, directly or indirectly,
of securities of SAFECO (not including in the securities beneficially owned by
such Person any securities acquired directly from SAFECO or its affiliates)
representing 25% or more of the combined voting power of SAFECO's then
outstanding securities, excluding any Person who becomes such a Beneficial Owner
in connection with a transaction described in clause (a) of paragraph (iii)
below; or

      (ii) the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals who, on the date
hereof, constitute the Board and any new director (other than a director whose
initial assumption of office is in connection with an actual or threatened
election contest, including but not limited to a consent solicitation, relating
to the election of directors of SAFECO) whose appointment or election by the
Board or nomination for election by SAFECO's stockholders was approved or
recommended by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors on the date hereof or whose appointment,
election or nomination for election was previously so approved or recommended;
or

      (iii) there is consummated a merger or consolidation of SAFECO or any
direct or indirect subsidiary of SAFECO with any other corporation, other than
(a) a merger or consolidation which would result in the voting securities of
SAFECO outstanding immediately prior to such merger or consolidation continuing
to represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity or any parent thereof), in

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<PAGE>   32

combination with the ownership of any trustee or other fiduciary holding
securities under an employee benefit plan of SAFECO or any subsidiary of SAFECO,
at least 75% of the combined voting power of the securities of SAFECO or such
surviving entity or any parent thereof outstanding immediately after such merger
or consolidation, or (b) a merger or consolidation effected to implement a
recapitalization of SAFECO (or similar transaction) in which no Person is or
becomes the Beneficial Owner, directly or indirectly, of securities of SAFECO
(not including in the securities Beneficially Owned by such Person any
securities acquired directly from SAFECO or its Affiliates) representing 25% or
more of the combined voting power of SAFECO's then outstanding securities; or

      (iv) the stockholders of SAFECO approve a plan of complete liquidation or
dissolution of SAFECO or there is consummated an agreement for the sale or
disposition by SAFECO of all or substantially all of SAFECO's assets, other than
a sale or disposition by SAFECO of all or substantially all of SAFECO's assets
to an entity, at least 75% of the combined voting power of the voting securities
of which are owned by stockholders of SAFECO in substantially the same
proportions as their ownership of SAFECO immediately prior to such sale.

Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have
occurred by virtue of the consummation of any transaction or series of
integrated transactions immediately following which the record holders of the
common stock of SAFECO immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate ownership in
an entity which owns all or substantially all of the assets of SAFECO
immediately following such transaction or series of transactions.

      (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.

      (I) "Committee" shall mean (i) the individuals (not fewer than three in
number) who, on the date six months before a Change in Control, constitute the
Compensation Committee of the Board, plus (ii) in the event that fewer than
three individuals are available from the group specified in clause (i) above for
any reason, such individuals as may be appointed by the individual or
individuals so available (including for this purpose any individual or
individuals previously so appointed under this clause (ii)).

      (J) "Company" shall mean SAFECO and its subsidiaries, collectively.

      (K) "Date of Termination" shall have the meaning stated in Section 7.2.

      (L) "Deferred Benefit" shall have the meaning stated in Section 5.4.

      (M) "Deferred Benefit Commencement Date" shall have the meaning stated in
Section 5.4.

      (N) "Disability" shall be deemed the reason for the termination by the
Company of the Executive's employment, if, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from the full-time performance of the Executive's

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<PAGE>   33

duties with the Company for a period of one hundred and thirty (130) consecutive
business days, the Company shall have given the Executive a Notice of
Termination for Disability, and, within thirty (30) days after such Notice of
Termination is given, the Executive shall not have returned to the full-time
performance of the Executive's duties.

      (O) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.

      (P) "Excise Tax" shall mean any excise tax imposed under section 4999 of
the Code.

      (Q) "Executive" shall mean the individual named in the first paragraph of
this Agreement.

      (R) "Good Reason" for termination by the Executive of the Executive's
employment shall mean the occurrence (without the Executive's express written
consent) after any Change in Control, or prior to a Change in Control under the
circumstances described in clause (ii) of the second sentence of Section 6.1
(treating all references in paragraphs (i) through (vii) below to a "Change in
Control" as references to a "Potential Change in Control"), of any one of the
following acts by the Company, or failures by the Company to act, unless, in the
case of any act or failure to act described in paragraph (i), (v), (vi) or (vii)
below, such act or failure to act is corrected prior to the Date of Termination
specified in the Notice of Termination given in respect thereof:

      (i) the assignment to the Executive of any duties inconsistent with the
Executive's status as a senior executive officer of the Company or a substantial
adverse alteration in the nature or status of the Executive's responsibilities
from those in effect immediately prior to the Change in Control;

      (ii) a reduction by the Company in the Executive's annual base salary as
in effect on the date hereof or as the same may be increased from time to time;

      (iii) the relocation of the Executive's principal place of employment to a
location outside of King County, Washington (or, if different, the county in
which such principal place of employment is located immediately prior to the
Change in Control) or the Company's requiring the Executive to be based anywhere
other than such principal place of employment (or permitted relocation thereof)
except for required travel on the Company's business to an extent substantially
consistent with the Executive's present business travel obligations;

      (iv) the failure by the Company to pay to the Executive any portion of the
Executive's current compensation, or to pay to the Executive any portion of an
installment of deferred compensation under any deferred compensation program of
the Company, within seven (7) days of the date such compensation is due;

      (v) the failure by the Company to continue in effect any compensation plan
(including stock option, restricted stock, stock appreciation right, incentive
compensation and bonus plans) in which the Executive participates immediately
prior to the Change in Control which is material

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<PAGE>   34

to the Executive's total compensation, unless an equitable arrangement (embodied
in an ongoing substitute or alternative plan) has been made with respect to such
plan, or the failure by the Company to continue the Executive's participation
therein (or in such substitute or alternative plan) on a basis not materially
less favorable, both in terms of the amount or timing of payment of benefits
provided and the level of the Executive's participation relative to other
participants, as existed immediately prior to the Change in Control;

      (vi) the failure by the Company to continue to provide the Executive with
benefits substantially similar to those enjoyed by the Executive under any of
the Company's profit sharing, pension, savings, life insurance, medical, health
and accident, or disability plans in which the Executive was participating
immediately prior to the Change in Control, the taking of any action by the
Company which would directly or indirectly materially reduce any of such
benefits or deprive the Executive of any material fringe benefit enjoyed by the
Executive at the time of the Change in Control, or the failure by the Company to
provide the Executive with the number of paid vacation days to which the
Executive is entitled on the basis of years of service with the Company in
accordance with the Company's normal vacation policy in effect at the time of
the Change in Control; or

      (vii) any purported termination of the Executive's employment which is not
effected pursuant to a Notice of Termination satisfying the requirements of
Section 7.1; for purposes of this Agreement, no such purported termination shall
be effective.

      The Executive's right to terminate the Executive's employment for Good
Reason shall not be affected by the Executive's incapacity due to physical or
mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.

      For purposes of any determination regarding the existence of Good Reason,
any claim by the Executive that Good Reason exists shall be presumed to be
correct unless the Company establishes to the Committee by clear and convincing
evidence that Good Reason does not exist.

      (S) "Gross-Up Payment" shall have the meaning stated in Section 6.2.

      (T) "Notice of Termination" shall have the meaning stated in Section 7.1.

      (U) "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except
that such term shall not include (i) SAFECO or any of its subsidiaries, (ii) a
trustee or other fiduciary holding securities under an employee benefit plan of
SAFECO or any of its Affiliates, (iii) an underwriter temporarily holding
securities pursuant to an offering of such securities, or (iv) a corporation
owned, directly or indirectly, by the stockholders of SAFECO in substantially
the same proportions as their ownership of stock of SAFECO.

      (V) "Potential Change in Control" shall be deemed to have occurred if the
event stated in any one of the following paragraphs shall have occurred:

                                       14
<PAGE>   35

      (i) SAFECO enters into an agreement, the consummation of which would
result in the occurrence of a Change in Control;

      (ii) SAFECO or any Person publicly announces an intention to take or to
consider taking actions which, if consummated, would constitute a Change in
Control;

      (iii) any Person becomes the Beneficial Owner, directly or indirectly, of
securities of SAFECO representing 10% or more of either the then outstanding
shares of common stock of SAFECO or the combined voting power of the SAFECO's
then outstanding securities (not including in the securities beneficially owned
by such Person any securities acquired directly from SAFECO or its affiliates);
or

      (iv) the Board adopts a resolution to the effect that, for purposes of
this Agreement, a Potential Change in Control has occurred.

      (W) "Retirement" shall be deemed the reason for the termination by the
Company or the Executive of the Executive's employment if such employment is
terminated on or after the date Executive attains age 65.

      (X) "SAFECO" shall mean SAFECO Corporation and, except in determining
under Section 15(G) whether or not any Change in Control has occurred, shall
include any successor to its business and/or assets which assumes and agrees to
perform this Agreement by operation of law, or otherwise.

      (Y) "Severance Payments" shall mean the payments so described in Section
6.1.

      (Z) "Severance Period" shall have the meaning stated in Section 6.1(B).

      (AA) "Tax Counsel" shall have the meaning stated in Section 6.2.

      (BB) "Term" shall mean the period of time described in Section 2
(including any extension, continuation or termination described therein).

      (CC) "Total Payments" shall mean the payments so described in Section 6.2.



SAFECO CORPORATION


By:
    ---------------------------------     --------------------------------------
    William G. Reed, Jr.                  Michael S. McGavick
    Chairman of the Board of Directors    Address:

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