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                                                                    EXHIBIT 10.4


                               SAFECO CORPORATION

                       NONQUALIFIED STOCK OPTION CONTRACT

SAFECO Corporation ("SAFECO") hereby grants to Michael S. McGavick ("Optionee")
a nonqualified option to purchase 300,000 shares of SAFECO Common Stock, subject
to the SAFECO Long-Term Incentive Plan of 1997 and the following terms and
conditions:

1.    TERM. This option contract is effective from January 26, 2001, until the
      earlier of (i) the close of business ten years from such date or (ii) such
      other date as may apply pursuant to paragraph 8 below relating to
      retirement, disability, death or other termination of employment.

2.    PURCHASE PRICE. Optionee may purchase the shares covered by this option
      contract at a price of $24.25 per share.

3.    LIMITATIONS ON EXERCISE (VESTING).

      (a)   Except as otherwise provided in this Option Contract, this option
            will become exercisable (or, as stated herein, shall "vest") 100% on
            January 26, 2006, and no part of this option shall be vested before
            that date.

      (b)   If, however, the Optionee is terminated by SAFECO without Cause, as
            defined in the Optionee's Employment Agreement dated as of January
            26, 2001 (the "Employment Agreement") on or before January 26, 2004,
            or if the Optionee's employment terminates for any reason after
            January 26, 2004, the vesting of this option shall be accelerated as
            of the termination date in a percentage equivalent to the number of
            whole months from (and including) February 2001 to the date of
            termination divided by 60.

4.    EXERCISE OF OPTIONS. The Optionee may exercise up to the total number of
      shares that have vested, subject to a minimum purchase of 10 shares at any
      one time. Shares that have vested may be purchased at any time until this
      option contract terminates. All unexercised rights will terminate upon the
      expiration of the option contract term.

5.    METHOD OF EXERCISE. To exercise this option, in whole or in part, the
      Optionee shall deposit with the controller of SAFECO a written notice
      identifying the option by date and designating the number of shares as to
      which the Optionee is exercising the option, accompanied by payment in
      full for the number of shares being purchased.

6.    EXERCISE OF RIGHTS FOLLOWING CHANGE IN CONTROL. Notwithstanding the
      limitations on exercise set forth in paragraph 3, in the event there is a
      Change in Control of SAFECO, the option shall become fully vested and
      exercisable immediately prior to the Change in Control and may thereafter
      be exercised in whole or in part at any time prior to the expiration of
      the term of the option provided in this option contract.

7.    TRANSFERABILITY. This option shall not be subject to execution, attachment
      or similar process. Except as permitted by the Plan and the Compensation
      Committee, this option may not be assigned, pledged or transferred in any
      manner, by operation of law or otherwise, except by will or by the laws of
      descent and distribution, and during the lifetime of the Optionee, only
      the Optionee or the Optionee's guardian may exercise this option.

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8.    TERMINATION OF EMPLOYMENT; RETIREMENT; DISABILITY AND DEATH

      (a)   In the event the Optionee ceases to be employed by SAFECO, this
            option may be exercised, but only to the extent exercisable on the
            date of termination of employment, at any time within three months
            following such termination of employment, except that:

            (i)   If the Optionee's employment is terminated by SAFECO without
                  Cause (as Cause is defined in the Employment Contract) on or
                  before January 26, 2004, or if Employee's employment
                  terminates for any reason after January 26, 2004, the vested
                  portion of this option, as determined in accordance with
                  paragraph 3(b), may be exercised until the earlier of one year
                  after termination of Employee's employment and January 26,
                  2011.

            (ii)  If the Optionee's termination of employment is on account of
                  Retirement, then the option, to the extent exercisable at the
                  date of termination of employment, may be exercised at any
                  time prior to the expiration of its stated term, but in no
                  event later than the fifth anniversary date of the Optionee's
                  termination of employment.

            (iii) If the Optionee's termination of employment is on account of a
                  permanent and total disability within the meaning of Section
                  22(e)(3) of the Internal Revenue Code (or any successor
                  provision), then the option, to the extent exercisable at the
                  date of termination of employment, may be exercised at any
                  time within one year after the date of termination or until
                  January 26, 2011, whichever is the shorter period.

            (iv)  If the Optionee's termination of employment is caused by the
                  death of the Optionee, then the option may be exercised at any
                  time prior to the expiration of the term stated in this option
                  contract by the person(s) to whom the Optionee's rights pass
                  by will or by operation of law without regard to any
                  requirements related to continued employment or installment
                  vesting.

            (v)   If the Optionee dies following termination of employment and
                  during the period in which the option is exercisable under
                  subparagraph (i), (ii), (iii) or (iv) of this paragraph 8,
                  then, to the extent the option was vested at the date of
                  termination of employment, the option may be exercised at any
                  time prior to the expiration of the term stated in this option
                  contract by the person(s) to whom the Optionee's rights pass
                  by will or by operation of law.

      (b)   Any portion of the option that is not exercisable on the date of
            termination of the Optionee's employment shall terminate on such
            date, unless the Committee determines otherwise.

      (c)   To the extent that the option is not exercised following termination
            of employment within the time periods provided in this paragraph 8,
            all further rights to exercise the option shall terminate.

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9.    RIGHTS AS STOCKHOLDER. Neither the Optionee nor the Optionee's legal
      representative, heir, legatee or distributee shall be deemed to be the
      holder of, or to have any of the rights of a holder with respect to, any
      shares subject to this option until after the stock is issued.

10.   PROVISIONS OF THE SAFECO LONG-TERM INCENTIVE PLAN OF 1997. This option is
      subject to all of the provisions of the SAFECO Long-Term Incentive Plan of
      1997 and, to the extent provided in such Plan, to all constructions,
      interpretations, rules and regulations which may from time to time be
      promulgated pursuant to or in connection with the Plan. Capitalized terms
      not otherwise defined in this option contract shall have the meanings
      assigned to them in the Plan.

11.   FORFEITURE.

      (a)   If, at any time within (i) one year after the exercise of any
            portion of this option or (ii) one year after termination of
            employment, whichever is the later (the "Restricted Period"), the
            Optionee engages in any activity harmful to SAFECO's interests or
            which is in competition with any of SAFECO's operations, then the
            Optionee's rights under this option shall terminate effective as of
            the date on which the Optionee commences such activity (unless
            terminated sooner by operation of another term or condition of this
            option), and any option gain realized by the Optionee from
            exercising all or any portion of the option during the Restricted
            Period shall be immediately payable to SAFECO.

      (b)   Such harmful or competitive activities include, without limitation,
            (i) engaging in conduct related to the Optionee's employment for
            which either criminal or civil penalties may be sought; (ii)
            accepting employment with or serving as a consultant, advisor or in
            any other capacity to any party which is in competition with any
            member or members of the SAFECO family of companies in any of their
            lines of business; (iii) disclosing or misusing any confidential
            information concerning the SAFECO companies; and (iv) participating
            in a hostile attempt to acquire control of SAFECO.

      (c)   SAFECO shall have the right to reduce payment of any amounts owed to
            the Optionee (for wages, fringe benefits, unused vacation or any
            other reason except as may be prohibited by law) to the extent of
            any amounts owing to SAFECO by the Optionee under the foregoing
            forfeiture provisions.

      (d)   The provisions of subparagraphs (a), (b) and (c) of this paragraph
            11 shall lapse and be of no further effect upon the occurrence of a
            Change in Control (as defined in the Plan).

12.   GOVERNING LAW. This option contract shall be governed by the laws of the
      State of Washington, excluding any conflicts or choice-of-law rule or
      principle that might otherwise refer construction or interpretation of the
      option contract to the substantive law of another jurisdiction. The
      Optionee and SAFECO submit to the exclusive jurisdiction

and venue of the federal or state courts in King County, Washington, to resolve
issues that may arise out of or relate to this option contract.

Dated:  January 26, 2001

SAFECO CORPORATION                       OPTIONEE

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By
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   Robert S. Cline                       Michael S. McGavick
   Chair, Compensation Committee

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