Sounds like the devices used in ATMs. I thought the 'pin and chip' cards (which are the norm in the US) were supposed to prevent this kind of fraud.
Don't forget that if your card is used fraudulently, you're only liable for the first £50. I think you're responsible for notifying them of any fraudulent transactions within about 2 months of receipt of a statement. Paying credit card companies for insurance against loss or theft is throwing money away.