I could be wrong but I think the policy is that they would have to be fearing for their lives. Some states also have a fleeing felon law that allows shooting if there is no other way to prevent the escape. In this situation, the caller said he was holding a woman hostage, which he clearly wasn't. They also verified he had no weapons on his person.
It's easy to sit back and say what should've been done while not being in the situation and not having the benefit of hindsight but it seems like after verifying he didn't have a weapon on him, they could've explained the situation, had him sit or lay down while they secured the car and checked for a hostage.