The western mining areas of China, which are rich in coal resources, lack water resources. Large-scale and high-intensity coal mining in China’s western mining areas has led to the loss of groundwater resources. Underground reservoirs in coal mines are an effective means of achieving the protection and utilization of water resources in these western mining areas. One of the important standards for the safety of an underground reservoir in a coal mine involves checking whether the development of cracks in the coal pillar dam body, under the dual stress conditions of overlying strata and lateral water pressure, passes through the coal pillar dam body or its top and bottom plates, forming a seepage channel for mine water. This article focuses on the safety issues associated with coal pillar dams in the underground reservoirs of coal mines. From the perspectives of overlying rock pressure and lateral water pressure on coal pillar dams, mechanical models, numerical calculations, and similar simulation methods were used to analyze macroscopic deformation, displacement, and crack development in coal pillar dams of different sizes under vertical and horizontal stress and to study the optimum width of coal pillar dams. Our research results indicated that the optimal width of the coal pillar dam body can be determined via numerical simulation based on the deformation and stress state in a given dam. When the horizontal stress increases, the smaller the coal pillar width is, the greater the increment of syy and sxx becomes, and the more likely the coal pillar is to be damaged. Similar simulations showed that the smaller the size of the coal pillar is, the easier it is to generate stress concentration, and the more likely this stress is to “eat away” the coal pillar dam body. There is a certain relationship between the size of the coal pillar dam and the range of crack development. The larger the coal pillar size is, the less obvious the stress concentration effect becomes, and the less likely the crack is to penetrate the internal and external parts of the reservoir. Taking the Shangwan mine as an example, it was determined that the maximum water head height that could be carried by the 15-m coal pillar dam body was 50 m. A comprehensive study of the development and evolution of cracks in the coal pillar dam of an underground reservoir in a coal mine, and the characteristics of sliding instability, was conducted to determine the optimal size and maximum water storage height of a coal pillar that does not penetrate the inner and outer parts of the reservoir. The development and evolution of cracks are important factors affecting the stability of coal pillar dams. This study can expand and improve the basic theory of underground reservoirs in coal mines, provide a scientific basis for determining the optimum size of a coal pillar dam, guarantee the long-term safe and stable operation of the coal pillar dams of underground reservoirs in coal mines, and continuously save mine water resources and increase the economic benefits of coal mines. These implications are of great significance for the long-term stable operation of underground reservoirs in coal mines under similar geological conditions.