First let me make a comment about geometry construction in PDE Toolbox. C1+C2 says that you want to perform the analysis on a region that contains both C1 and C2 (I believe this is what you want). C1-C2 says that you want to perform the analysis on a region with a circular hole with size of C2 in the center (not what you want).
Now I'll comment on boundary conditions. No boundary condition is needed at the boundary between the two materials because the finite element solution approach in PDE Toolbox is based on a "weak form" of the differential equations (see this page for details http://www.mathworks.com/help/pde/ug/elliptic-pdes.html) Basically, the weak form contains no derivatives of the coefficient matrix to cause problems at material interfaces. Because a boundary condition on an "internal" boundary like the one between C1 and C2 is almost never needed in practice, there isn't a simple way in PDE Toolbox to apply such a boundary condition.
Bill
