I have taken thermostates out of my cars that have literaly come apart and are in pieces. It's probably possible if this happens for one of the pieces to partially restrict the water flow enough to overheat. Never had an overheating problem caused by one not being able to close all the way.

I just got my car back ('96 850T) after having it towed to the shop on Monday morning - I was in stop and go traffic on the freeway when I notice some steam coming from the front passenger side. My temperature gauge read "HOT! HOT! HOT!" so I pulled over to see that the coolant was boiling over and out from the overflow reservoir.

I had her towed to a local reputable shop (Bob Workman's Volvo) and after pressure testing the system found no leaks but did find the following:

1) thermostat was missing..... no not malfunctioning, but missing as in not there at all.

2) the fan motor was dead.

I've had this car for about 4 months and this is the first time this has happened. So apparently, I was running without a thermostat without any real issues. It probably was when the fan motor failed that it all went down and I overheated.

Just thought I'd share in case it might shed some insight for anyone.

The "service" light comes when it is time for an oil change, not to be confused with the check engine light. If the CEL is on, go to an autoparts store and borrow or have them read the OBDII codes and clear them. Then find out what the codes mean.
Normally, if the thermostat dies it does so in the open position, allowing coolant to circulate all of the time and your temp gauge will read cooler than normal. If the thermostat is NOT a Volvo product, it may be stuck closed and that will result in over heating because the coolant is never circulated through the radiator.
The coolant temp sensor can malfunction. That usually results in a CEL being on, but not always. It can be checked with a voltage tester, checking the Ohms between the two contacts on the switch and determining the voltage resistance compared to the temperature. Seldom does a faulty ECT sensor cause a hotter than normal reading in the instrument panel.
Your over heating problem could be the result of a failed engine fan relay, not allowing the fan to run while you are stopped or in slow traffic.

Klaus

So from my experience has been that if the tstat goes, the temp will never get to 3:00 o'clock. That said, I have only had one go bad in a T760 and a GLT 850 T.

Temp sensors can trip a check engine light, but have seen it the other way.
A bad t'stat will cause overheating because the water circulates through the engine and radiator so quickly that the fan never has a chance to cool the water in the radiator. The thermostat keeps the water in place longer so the fan can cool it. Doesn't seem to make sense, but that is the way it works.

You may need to replace both the temp sensor and thermostat. The temp sensor is dual function: feeds gauge and computer temp information.

Good luck,

dick