A Policy Lynch is one that is done for arbitrary reasons.
Most commonly, it describes the lynch of a player who is not found to be particularly scummy, but because the player's bad play will hurt the town later on. However, policy lynches can be requested on other players - for instance, players who claim Vengeful under duress will generally be lynched.
The efficacy of policy lynches is a hotly debated topic in almost any game in which it comes up due to the fact that the town arguably loses an opportunity to lynch a scummy player.
See also: Lynch All Liars