the issue here is that you are dealing with morons....
Ok that being said...lets look at it a bit more objectivly...you brought in a damaged head to be repaired. Machine work on heads and other damaged parts is not a sure bet, even when done properly....shops will tell you otherwise, but the fact remains that sometimes the heads are just ruined, but a shop may try to do the best they can and hope it works. That being said, I don't think that these guys did the best that they can for the given issue. Machine work on that head is not diff than machine work on any other head. I would go in and raise hell and demand the whole cost back...the machine work fee, the head gasket cost and the head bolt costs...you are not likely to get the cost of a new head out of them as I said...machine work for repairing is not a sure bet all the time. If they Bitch and moan about that threaten to file a complaint with you state's Better Business Bureau...while this really has no teeth to it, it sounds official and scares many of the uninitiated...I have used it in the past with great success. Small claims court is the next option...but not really a good one. I personally don't really care for the venue to begin with as it always feels a bit like judge judy...and in turn a bit arbitrary...hiring an attorney would be a waste of money all together...although we have had clients spend litterally tens of thousands just to get revenge...not worth it unless you are insain

now as for minimum head thickness....find out how much more milling it would take to fix the groove issue...and then find out if the valves actually contact the pistons. if not...I say mill the thing and bolt it up. Although I am not all that familiar with volvo diesels...it has been my experience in the past that volvo minimum head thickness ratings are super conservative...I took nearly 3X the max mill on my 244dl's head...no valve timing issues at all, only I had to back off the ignition timing about 2 degrees to prevent knock...not an issue in your oil burner. If the valves will hit the pistons, some of the better shops can notch the pistons (admittedly I have never seen this on a diesel before). this can sometimes be done with the head removed, but the engine still in the car...if valve clearance is an issue...there is always the dished piston idea, but that may hurt the output of your diesel as compression will undoubtedly drop...the last option is that there are some companies out there who can make super thick head gaskets to compensate for over-milled heads...apparently this is common on heavy equipment....you might look into that. Good luck...and give em hell.