I think Phil probably has it nailed. If I recall correctly, the wiring harness with the temp sensor goes under the front of the engine below the timing belt cover. There's lots of heat and oil there to help disintegrate the troublesome "eco" wire insulation that Volvo used up until around your year. The damaged area that's shorting is possibly inside the harness under the engine and not worth slitting open to repair. As a fix, cut the wire close to the temp sensor, locate the other end at the main block connector at the firewall (driver side, a Volvo wiring diagram may help), cut the wire there and run a new wire from the temp sensor to the block connector, this time going over and down the right fender and crossing over on the firewall. I used bulk oven wire that's designed for hot, harsh environments. As I recall, the D+ alt wire is also in that harness and it wouldn't hurt to re-route that wire at the same time. That's what I did on our '85 240 and never had another problem associated with that harness.
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Dave -still with 940's, prev 740/240/140/120 You'd think I'd have learned by now