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In my state, my dealer, the Volvo pre-owned certified used cars have VIP extended warranty and O2 sensors are covered.
One thing that I'd warn you about, before getting too nasty with those dealer people please realize that if they're the only dealer nearby, you will need to go back to them another day in the future as Volvo has made that inevitable. If you have other dealers around, you could go there BUT you will always need to take any new Volvo to a Volvo dealer again as things go wrong with them that independants can't repair.
If the dealership made a mistake, you'ld be better off getting it handled by talking nicely to a service manager who should want you to be happy and be a returning customer. Their CSI is important to them. They should be able to resolve this w/o "getting legal" on them.
I'm guessing that this was a misunderstanding rather than pure dishonesty. I also highly doubt that they'd still have your old O2 sensor laying around if not warranty and you do need an OEM Volvo O2 sensor for the S80, not some generic O2 sensor patched in (rigged) as I doubt it'd work normally and w/o setting codes.
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