I don't think any of us are in a sufficient position of knowledge to determine if the police action was justified.
But it seems to me the suspect that picked the house to hole up in should be the primary responsible party.
The second part of this is that it indemnifies the police of their actions, shifting the cost of their recklessness. You pay in taxes to give them APCs, and then you pay again when they blow things up with those APCs you bought them.
The police destroyed the house. It's really that simple. Their reasons for doing that happen to include that they were chasing a suspect. So?
I expect the police would be liable if a court found them to have caused damage which was completely unnecessary, although they have a lot of latitude in interpreting this. It's fairly easy to argue that doing whatever is safest for them (doesn't put them in the line of fire) is justified, and they shouldn't take any unnecessary risk to protect property.
Given that (rightly or wrongly) typically the police will not be liable for these situations, and the liable criminal will be unable to compensate, the burden should probably fall to insurers.