Firstly in reponse to setting the colour back after an escalation is complete, it is actually something you need to build into your process design as an automatic action if you wish to reset it - just because the escalation is over, if the colour changed as part of it, it will not reset it. See http://community.landesk.com/support/docs/DOC-12557 for details.
Escalations should only "Cancel" if a new escalation replaces it, as in if the 'Response Level' changes. I'm not sure how you've set your escalations up - perhaps a screenshot may be helpful. If you have set up the "Completion" criteria as leaving the same status it was activated on, then I would have thought it would have worked.
These escalations should be triggered on entering and leaving each status, i.e. when it enters "Insurance Form Pending" an escalation should begin by having a Activation Status of "Insurance Form Pending" and a timeframe of 5 days. Then the completion status should be "Insurance Form Pending" and should be set to Leaving Status.
Repeat this for each status escalation as necessary, also to reset the colour the first Escalation Action in each escalation should be a colour change back to white or nothing. Set this to occur at 0:00 and it should happen immediately upon the old escalations being completed and the new ones created.
When reading your scenario I wondered if it might be an idea to have seperate tasks created at each stage in the process. Each task could then have its own set of escalations that start and stop independently when they get to the right status. Then you could have another escalation which is always running against the main process and sending out escalations, to ensure that things never get forgotten.
Or if this is easier, you could have scheduled bulk actions that automatically run an action start the clock if its been stopped for a certain amount of time. Or to to send out a reminder if the clock has been stopped for a certain amount of time.