I can't imagine that response passing muster in court, because as another commenter pointed out, all damage would involve some kind of collision between two objects which means that if we accept their response then the policy would be worthless because it wouldn't be able to cover anything.

It's implied (in the context of motor vehicle insurance) that "collision" in their case means collision between two vehicles but they're now trying to be pedantic about it when it's in their favor.