Over the past couple of years, I had the same code show up from time to time, with subtly increasing frequency. Eventually, it failed altogether, and I had to replace it. Since LOML was then carless for a week, I am sorry I didn't change it out sooner. There are two sensors on the 850, one in front of the catalytic convertor and one behind. They operate in concert (this turns out to be important) to keep the exhaust springtime fresh. The signal you're getting is for the front one. Some things I learned:

1. ALWAYS REPLACE BOTH SENSORS. I replaced just the one showing the trouble code, but it turns out that the rear one can fail in a way too subtle to generate a trouble code, but enough to confuse the front one, which then sends the trouble code. The cost of buying two will make you gulp (heck, the cost of buying one probably will make you gulp - the only more expensive oxygen sensor I've ever seen was the one on the 1998 Henway), but it's cheaper than replacing just the front one, continuing to get the trouble code, then taking the car to the dealer when you get stumped - I think you can probably figure out how I know this.

2. Bay 13 has a good description of replacing the sensors: http://www.volvospeed.com/Repair/o2sensor1.php.

3. The connectors are the most Rube-Goldbergian devices I've ever seen, but, once you figure out how they work, not difficult to change out. One tip: the red cap moves a slide that pulls the connector in as you close it. If the connector halves don't remove easily, you haven't pulled the red cap up enough yet.